X subsequently appealed this decision to the SEC. In 2006, the SEC dismissed the application for review in this matter. For previous history in this matter, see SD Decision No. 03008.

In light of the Commission’s instructions, the NAC has considered the Firm’s renewed application and has determined to deny its request for X to return to the securities industry.

The NAC appointed a subcommittee ("the Remand Subcommittee") to consider this matter on remand and make a written recommendation to the Statutory Disqualification Committee. In turn, the Statutory Disqualification Committee considered the Remand Subcommittee’s recommendation and presented a written recommendation to the NAC, in accordance with NASD Procedural Rules 9524(a)(10) and 9524(b)(1).  In August 2005, the Remand Subcommittee sent a letter to the parties stating that NASD’s Central Registration Depository ("CRD"®) reflected that the Firm had discharged the Proposed Supervisor 1 in June 2005, due to "company downsizing."5 The Remand Subcommittee requested that the Firm submit the name of a different person to serve as X’s supervisor and that Member Regulation review the new submission and submit a written recommendation on his or her qualifications to supervise X. In August 2005, the Firm submitted a revised Application, proposing that the Proposed Supervisor 2 serve as the primary supervisor for X. 

In April 2003, a subcommittee ("Hearing Panel") of the Statutory Disqualification Committee of the NAC held a hearing on the matter. X appeared, accompanied by counsel, AD, and by the Firm’s former Chief Compliance Officer, Employee 1, who was then proposed as X’s supervisor. Subsequently, in correspondence dated July 2003, the Firm advised NASD that Employee 1 was no longer employed by the Sponsoring Firm and proposed that the Firm’s then Chief Operating Officer, serve as X’s Proposed Supervisor. PL appeared on behalf of NASD’s Department of Member Regulation ("Member Regulation").

This action was initiated on March 13, 2003, when the Sponsoring Firm completed a Membership Continuance Application ("MC-400" or "the Application") seeking to permit X to associate with the Sponsoring Firm. 

• The Permanent Injunction was based on a complaint issued by the Commission alleging that during late 1967 and early 1968, X participated in a scheme in which various lending institutions around the country were induced to make loans totaling more than $720,000, most of which went into default, to a company known as Firm 1. The two largest shareholders of Firm 1 stock perpetrated the scheme by contacting several traders, including X, and convincing them to insert quotations for Firm 1 stock in the "pink sheets" at $10 bid, $12 asked, with an understanding that the traders would be protected against loss. X and others thus falsely created the appearance of a market for the Firm 1 stock collateralizing the loans. X, who at the time was a trader, vice-president, director and 30 percent shareholder of a broker-dealer, inserted 45 to 50 quotations per day in the pink sheets for Firm 1 stock on most days during the relevant time period. The Commission noted that X never questioned the protective arrangement, although it was a clear "red flag" that should have alerted him to inquire into the business and financial condition of Firm 1.  

• The Commission brought an administrative proceeding against X based on this same misconduct. In December 1971, X consented to an Order Instituting Public Administrative Proceeding, Making Findings and Imposing a Remedial Sanction that suspended him for three months in all capacities. X completed that suspension in 1972.

More recently, in October 1992, X was statutorily disqualified because he pled guilty in a State 2 state court to falsifying business records. This misdemeanor qualifies as a statutorily disqualifying offense pursuant to NASD By-Laws, Art. III, Sec. 4(g)(1)(ii) (a conviction, within 10 years preceding the filing of any application for membership, for any felony or misdemeanor that arises out of the conduct of the business of a broker-dealer). This conviction ceased to be a statutorily disqualifying event in October 2002.

While he was employed as a trader by Firm 2, X agreed to "park" securities for another, now defunct broker-dealer. This misconduct resulted in false entries on both Firm 2's and the defunct broker-dealer’s FOCUS reports. Firm 2 terminated X due to this misconduct and the state court sentenced him to a one-year period of conditional discharge. 

Prior to the Sponsoring Firm’s Application, three separate firms submitted MC-400 applications in support of X’s return to the securities industry. As described below, NASD denied each of these applications, and the Commission affirmed the two denials that came before it on appeal.

X has not been employed by a broker-dealer since October 1992.  Since Firm 2 terminated him in 1992, he has been trading for his personal account and the accounts of his wife and stepdaughter.

On August 25, 2000, NASD denied a third firm’s MC-400 application for X to be associated as a limited representative – corporate securities representative. NASD reiterated its concern with the nature of X’s two securities-related statutorily disqualifying offenses and stated that X had demonstrated a pattern of securities-related misconduct. NASD also noted that it had found recent deficiencies in the supervisory procedures of one of the branch offices of the third firm and that the proposed supervisor was not qualified because he had very limited experience in the securities industry and had only been a general securities representative for a short time. X appealed this denial to the Commission, which dismissed the appeal in a decision dated May 2001. The Commission stated that the third firm had proposed a new supervisor for X after appealing the NAC’s decision to the Commission, but did not submit required information regarding the new supervisor’s qualifications. 

The Proposed Supervisor 2 has been a general securities representative since March 1993 and a general securities principal since November 1998. The Firm has employed the Proposed Supervisor 2 as a general securities principal since April 2002, and he currently supervises six registered representatives. The Proposed Supervisor 2 has no disciplinary history. The Proposed Supervisor 2 supervise X at the Firm’s main office. 

As the Commission stated in its 2005 decision remanding this matter, the legal standards that govern the NAC review are set forth in Van Dusen and Ross. 

The NAC considered whether the cited conduct underlying the statutorily disqualifying event was similar to other misconduct brought to NASD’s attention, because NASD may consider the former conduct along with the latter as forming a "significant pattern." 

The NAC noted that X’s 1969 Permanent Injunction resulted from his misconduct as a trader in inserting fictitious quotes in the pink sheets to further a manipulative scheme to create the false appearance of a market for ACI stock. Thus, X’s deceptive activities as a trader aided and abetted a market manipulation.  X’s subsequent 1992 misdemeanor conviction also resulted from his deceptive activities as a trader in parking securities for another firm. These activities caused false entries to be made on that firm’s FOCUS report and misrepresented its financial condition. X deceived his employer, circumvented its procedures, and engaged in an act intended to defraud NASD and the public. This activity was described by the State 2 District Attorney in an October 1992 letter to NASD as "a massive stock-rigging scheme in the over-the-counter market."  These incidents constitute a pattern of deceptive conduct that, in our judgment, seriously undermines his integrity and ability to deal fairly with public investors. The NAC noted that the pattern that emerged from X’s statutorily disqualifying event and his subsequent history of misconduct was one of deceitful misconduct connected to schemes to perpetrate a widespread fraud on the market and investors. Moreover, at the time of each of X’s offenses, he was acting as a trader at a securities firm, and he betrayed the trust that was placed in him both by the firms and the public. 

The NAC changed its prior finding that the proposed Sponsoring Firm has had "addressed satisfactorily" the risks represented by the statutorily disqualified individual's continued association, and now concluded that the Firm had failed to demonstrate its ability to establish and maintain heightened supervisory controls over X. 

• The record since that 2003 ruling now included evidence of several new NASD and State actions against the Firm. Those violations were deemed to demonstrate the Firm’s continuing inability to attend to routine details involved in the ongoing daily management of a securities business; and a breakdown in the Firm’s required daily supervisory and management controls that lead us to conclude that the Firm is not capable of assuming the additional heavy burden of supervising a statutorily disqualified individual such as X. That conclusion was buttressed by the fact that the Firm, in pursuing its sponsorship of X in this remand proceeding, neglected to inform NASD that it had terminated Proposed Supervisor 1 in June 2005 – the very person proposed as X’s supervisor. The Firm’s inattention to such a key element of the Application suggested that it may not be able to maintain heightened supervisory controls over X, a person with a history of deceitful misconduct.

Finally, Proposed Supervisor 2’s unblemished disciplinary record does not outweigh the very serious disciplinary histories of the Firm and X. The NAC was also troubled by the two specific roles that the Firm has outlined for X to play. 

• First, the Firm proposed that X will place orders with the Sponsoring Firm to buy and sell securities for his own brokerage account with the Firm and for the brokerage accounts of his wife and stepdaughter, provided they grant appropriate authority to X and the Firm. In considering this scenario, the NAC noted that that X could continue to trade those accounts through various means as a customer (and, hence, not requiring registration).

• Second, the Firm proposed that X will act as a "finder" for the Sponsoring Firm. He will introduce potential customers to the Firm, who will be expected to place orders with the Firm to buy or sell securities for their own accounts. The Sponsoring Firm asserts that X will not accept these accounts on behalf of the Firm or act as the registered representative in charge of these accounts. The Firm does, however, propose that X will receive an override of the commissions earned by the Firm from the unsolicited transactions executed in the accounts he introduces. X does therefore have a financial incentive to find as many of these customers as possible. Given his regulatory history, the NAC was not persuaded that X has the judgment and integrity to be engaged with the public in such a manner.

Here, we exercise our business judgment in concluding that based on the totality of facts, X should not be permitted to work in the securities business. See Halpert & Co., 50 S.E.C. 420, 422 (1990). 

See Frank Kufrovich, Exchange Act Rel. No. 45437, 2002 SEC LEXIS 357, at *16 (Feb. 13, 2002) (upholding NASD’s denial of a statutory disqualification applicant, who had committed non-securities related felonies, "based upon the totality of the circumstances" and NASD’s explanation of the bases for its conclusion that the applicant would present an unreasonable risk of harm to the market or investors).

• Paul Edward Van Dusen, 47 S.E.C. 668 (1981) 

• Arthur H. Ross, 50 S.E.C. 1082 (1992)

• Reuben D. Peters, Exchange Act Rel. No. 49819, 2004 SEC LEXIS 1245, at *16 (June 7, 2004), reconsideration denied, Exchange Act Rel. No. 51237, 2005 SEC LEXIS 419 (Feb. 22, 2005)
  

  • Van Dusen provides that in situations where the Commission has already addressed an individual’s misconduct through its administrative process and has chosen to impose certain sanctions for that misconduct, NASD should not consider the individual’s underlying misconduct when it evaluates a statutory disqualification application. The Commission stated that when the period of time specified in its order has passed, in the absence of "new information reflecting adversely on [the applicant’s] ability to function in his proposed employment in a manner consonant with the public interest," it is inconsistent with the remedial purposes of the Exchange Act and unfair to deny an application for re-entry. Van Dusen, 47 S.E.C. at 671.
    

  • The Commission also noted in Van Dusen, however, that an applicant’s re-entry is not "automatic" after the expiration of a given time period. Instead, the Commission instructed NASD to consider other factors, such as: 

    1. other misconduct in which the applicant may have engaged; 

    2. the nature and disciplinary history of the prospective employer; and 

    3. the supervision to be accorded the applicant. Van Dusen, 47 S.E.C. at 671. 
       

  • Subsequently, in Ross, the Commission noted that, if an applicant had engaged in additional misconduct that was similar to the misconduct underlying a bar order in which the time prohibiting application had passed, it was appropriate to consider both instances of misconduct "as forming a significant pattern" which might justify the denial of an application. Ross, 50 S.E.C. at 1085 n.10.
    

  • In Reuben Peters, the Commission extended the rationale of Van Dusen to apply to any statutorily disqualified individual whose disqualifying conduct has led the Commission to take administrative action that has resulted in sanctions that are less serious than a bar with the right to reapply. See Reuben D. Peters, Exchange Act Rel. No. 49819, 2004 SEC LEXIS 1245, at *16 (June 7, 2004), reconsideration denied, Exchange Act Rel. No. 51237, 2005 SEC LEXIS 419 (Feb. 22, 2005) ("Although the administrative sanctions at issue in both Van Dusen and Ross were conditional bars, nothing in the rationale of those two decisions suggests that the standard set forth therein is not equally applicable to any statutorily disqualified person whose disqualifying conduct has also resulted in administrative sanctions imposed by [the Commission] pursuant to Section 15 of the Exchange Act.")