| E. Magnus Oppenheim & Co., Inc.
(the "Firm"), an NASD member since December 1983,
operates as a $5,000 fully-disclosed, non-clearing broker and
provides investment management services. Mr. E. Magnus
Oppenheim owns the Firm, serves as its President, and is a
financial/operations principal (“FINOP”). Pursuant to Rule
17a-5(a)(2)(iii), the Firm is required to file a
Financial and Operational Combined Uniform Single (“FOCUS”)
Report within 17 business days of the end of each calendar
quarter. For the calendar
quarter ending December 31, 2001, the Firm should have
filed its FOCUS Report
by January 25, 2002, but instead filed it on
February 4, 2002, at least five business days late
(although this appears to be six days late, the record states
"five").
On January 30,
2002, NASD notified the Firm in writing that it had
failed to file its December 2001 FOCUS Report and requested
that the Firm acknowledge receipt of the notification in
writing. Although the Firm’s accountant called NASD on
February 1, 2004 regarding the late report, this was
apparently not in response to the NASD late filing notice
because the appeal to the SEC states that the Firm “never
ever received such a letter.” Accordingly, the Firm
did not comply with the NASD's request.
The Firm had previously filed
five other late FOCUS Reports for the calendar quarters
ending March 1999, June 1999, December 1999, March 2000, and
December 2000 (the “Five Reports”). NASD issued a warning
letter to the Firm regarding the late filing for March 2000,
and requested a written acknowledgment of receipt. Regarding
the late filing for December
2000, NASD issued a Letter of Caution and a follow-up
letter to the Firm and requested a written description of
corrective action. Although the Firm had telephone
conversations with NASD regarding the late filings, it
provided no written response to any of these letters.
Following the Firm’s five late filings as well as its
failure to respond to NASD’s three letters, NASD orally
notified the Firm that it could avoid formal disciplinary
action as to the late December 2001 FOCUS Report by accepting
the terms of a Minor Rule Violation Plan (“MRVP”)
settlement offer that included paying a $500 fine. The parties
did not reach an
agreement as to an MRVP settlement.
On January 6, 2003,
NASD filed a formal complaint against the Firm for its
sixth late filing, the December 2001 FOCUS Report. In its
decision of August 19, 2003, the NASD Hearing Panel (“Hearing
Panel”) found that the Firm had filed an untimely FOCUS
Report as alleged in NASD’s complaint. In determining the
appropriate sanction, the Hearing
Panel considered several factors supporting leniency,
including the number of days late the filing was made, the
Firm’s small size, the Firm’s difficulties at the time
with a transition to a new accountant and the new FOCUS
reporting system, the lack of complaints from clients, the
lack of any attempt to delay disclosure of deficiencies, and
the absence of investor harm. The Hearing Panel, found,
however, that “the most significant countervailing factor”
was the Firm’s history of filing the Five Reports late.
Based, in part, on the previous filing deficiencies, the
Hearing Panel fined
the Firm $1,000, ordered it to file a statement
of corrective action, and imposed $1,968.74
in costs.
NASD’s National Adjudicatory Council (the “NAC”)
affirmed the Hearing Panel’s decision, except that it reduced
the fine to $500. In addition to the factors already
considered by the Hearing Panel, the NAC also found that the
Firm “apparently resolved its financial reporting
deficiencies,” and determined that no
remedial purpose would be served by imposing a higher sanction. |
Putting
Things into FOCUS
Securities
Exchange Act of 1934 Rule 17a-5 (17
C.F.R. § 240.17a-5(a)(2)(iii))_:
Reports to Be Made by Certain Brokers and Dealers
(a) Filing of monthly and quarterly reports.
1.
This paragraph (a) shall apply to every broker or dealer
registered pursuant to section 15 of the Act.
2.
(iii)Every broker or dealer who does
not carry nor clear
transactions nor carry customer accounts shall file Part IIA
of Form X-17A-5 within
17 business days after the end of each calendar quarter
and within 17 business days after the date selected for the
annual audit of financial statements where said date is
other than the end of the calendar quarter.
See
a copy of the FOCUS
Part IIA.
NASD
Code of Procedure Rule 9216(b)
Procedure for Violation Under Plan Pursuant to SEC Rule
19d-1(c)(2) [Minor Rule Violation Plan "MRVP:]
Fines
imposed under the MRVP are subject to a maximum
of $2,500,
and, as opposed to a formal disciplinary proceeding, the
matter would not
appear on the member’s record
or be required to be reported on certain publicly available
member forms (e.g., Form BD). Members or their associated
persons are not required to accept an MRVP settlement offer
and may proceed to a formal disciplinary proceeding
instead.
NASD
Business Conduct Rule 2110
Standards of Commercial Honor and Principles of Trade
A
member, in the conduct of his business, shall observe high
standards of commercial honor and just and equitable
principles of trade.
|
The SEC Appeal
DID THE FIRM VIOLATE
17a-5 and NASD Conduct Rule 2110?
Preliminarily, the SEC quickly sustained the NASD's
finding that the Firm failed to timely file its FOCUS in violation
of Rule 17a-5(a)(iii) and  NASD
Business Conduct Rule 2110.
DID THE PROPOSED MRVP
SETTLEMENT VIOLATE THE FIRM'S DUE PROCESS AND FREE SPEECH RIGHTS?
|
In its appeal to the SEC, the Firm argued that
NASD’s proposed MRVP settlement violated its due process and free
speech rights under the United States Constitution because the
proposed settlement would have prevented the Firm from defending
itself. Applicant argued that the settlement would have resulted in
its acceptance of a finding of violation, a consent to the
imposition of sanctions, and an agreement to wiave its right to a
hearing. The Firm deemed the conditions to constitute a
"surrender" and agreement to charges it didn't agree with.
Unquestionably, the SEC was puzzled by he
significance of the Firm's arguments. The SEC noted that the
MRVP does not require anyone to “surrender” or agree to charges
that are in dispute, and characterized the plan as providing for
a
meaningful sanction for the minor or
technical violation of a rule when the initiation of a
disciplinary proceeding through the formal complaint process would
be more costly and time-consuming than would be warranted. The
MRVP provides an efficient alternative means by which to deter
violations of rules while maintaining procedural rights for
disciplined persons.”
Moreover, and perhaps more to the point, members or
their associated persons are not required to accept an MRVP
settlement offer and instead may proceed to a formal disciplinary
proceeding where a defense against the charges may be presented.
Here, the Firm opted to reject the settlement and proceed to a
formal disciplinary hearing.
The
SEC concluded that NASD followed all required procedural safeguards
in connection with the hearing:
-
The Firm received adequate notice
of the complaint,
-
which contained sufficient
detail to apprise the Firm of the charges against
it.
-
NASD conducted a hearing
on the record
-
at which the Firm was given the
opportunity to confront and cross-examine adverse
witnesses and
-
to present
the Firm's own case and witnesses.
|
What???
Are you sure??? Where Does It Say That????
Multiple courts and
the SEC have held that the
Constitutional protections asserted by Applicant are inapplicable to
NASD proceedings.
See, e.g., Lugar v. Edmondson Oil Co., 457 U.S.
922, 936-37 (1982) (noting that the Fifth and Fourteenth Amendments
to the United States Constitution protect individuals only against
violation of constitutional rights by the government, not private
actors);
D.L. Cromwell Invs. v. NASD Regulation, Inc., 279 F.3d 155,
162 (2d Cir. 2002) (upholding dismissal of Fifth Amendment claims
because NASD is not a governmental
actor), cert. denied, 537 U.S.
1028 (2002);
Jones v. SEC, 115 F.3d 1173, 1182-83 (4th Cir. 1997)
(rejecting claims based on Fifth Amendments’ Double Jeopardy
Clause noting NASD is not a governmental
actor);
Desiderio v. NASD,
191 F.3d 198, 206 (2d Cir. 1999) (finding that NASD is not a state
actor, and Constitutional requirements generally do not apply to
it);
see also William J. Gallagher, Exchange Act Rel. No. 47501
(Mar. 14, 2003), 79 SEC Docket 3071, 3075.
HOWEVER!!!
the NASD is required to provide fair procedures for the disciplining of
members pursuant to Exchange Act Section
15A(h)(1) and the NASD Code
of Procedure. 15 U.S.C. § 780-3(b)(8); NASD Manual at 7301 (2000);
Robert Fitzpatrick, Exchange Act Release No. 44956 (Oct. 19, 2001),
76 SEC Docket 252, 258, motion for reconsideration denied, Exchange
Act Rel. No. 45170 (Dec. 19, 2001), 76 SEC Docket 1197, review
denied, 63 Fed Appx. 20 (2d Cir. 2003) (unpublished summary order). |
WAS THE NASD'S
SANCTION EXCESSIVE OR OPPRESSIVE?
With respect to
filing a FOCUS Report late, NASD Sanction Guidelines recommend a
fine ranging from $1,000 to $20,000 --- the $500
fine imposed here actually falls below the range. In determining sanctions for FOCUS Report violations,
the Sanction Guideline factors
to be considered include how many days late the firm filed the
report and whether the firm filed late to delay disclosure of an
operational, financial, or recordkeeping deficiency. The NAC must
have considered these and several other
mitigating factors, particularly because it reduced the fine imposed
by the Hearing Panel. Further, the NAC did give some positive
consideration to the fact that the filing was
made only five business days late and that there was no attempt to delay
disclosure of deficiencies. Similarly, the NAC acknowledged the Firm’s small
size and found that “no client has ever complained
about the Firm,
no investor harm resulted from the Firm’s violation, and the Firm
appears to have resolved its financial reporting
deficiencies.”
Moreover, the NAC also found mitigating the fact that, at the time
of the violation, the Firm was in a period of transition involving a
new accountant and a new FOCUS reporting system. Mr. Oppenheim
argued
that a memorandum written by the Firm’s accountant, in which the
accountant “took the full blame for this late filing[,] . . .
exonerated our firm.”
The
SEC found that the NAC properly considered the pertinent mitigating factors
and, given Oppenheim’s statement above, that the NAC did not
unfairly characterize the Firm as rejecting responsibility for the
late filing (which the NAC considered this to mean that the
Firm failed to accept responsibility for the late filing). The SEC
warned that the Firm may not shift
responsibility for its timely filing of FOCUS Reports to a
third-party accountant.
DID NASD ACT
IMPROPERLY IN CONSIDERING THE LATE FILING OF FIVE PRIOR REPORTS?
The Firm contends that it filed the Five Reports timely and that
it is therefore improper to consider these reports as a
countervailing factor in determining the appropriate sanction. The record
included, as to each late filing, a
computerized report generated by the FOCUS computer system that
shows, among other things, the Firm’s identification number, the
Firm’s name, the quarterly FOCUS period, and the date NASD
received the filing from the Firm. An NASD examiner responsible for
reviewing the Firm’s FOCUS filings testified that the date shown
on the computer report was automatically and contemporaneously
generated when the Firm filed the report. This examiner further
testified that the Five Reports were filed late. The record also
contains a warning letter from NASD that the Firm received as a
result of the March 2000 late filing and a Letter of Caution from
NASD to the Firm as a result of the December 2000 late filing.
In an effort to argue that it had filed the reports timely (or to
perhaps suggest that timeliness wasn't as critical a factor as
suggested by the NASD), the Firm alleged
various shortcomings of the FOCUS filing system, such as a change in
the filing process and the lack of a computerized reply or receipt
following a filing. The Firm also introduced newspaper reports
regarding NASDAQ trading system failures and a letter from the Firm’s
computer technician that suggested the possibility of processing
failures resulting from Internet traffic or a server outage.
The
SEC referenced the Firm's demonstration of alleged NASD FOCUS
systems shortcomings as "vague information," which it
found "insufficient to counter the concrete
evidence in the record that the Five Reports were filed late."
Worse, the SEC seemed
troubled by the Firm's efforts to minimize the importance of timely
filing required reports, and pointedly concurred with the
NASD's requirement (which the SEC also imposed) that the Firm to
"file a statement of
corrective action in order to ensure that the Firm
understands the significance of complying . . ."
DID NASD ACT
IMPROPERLY IN CONSIDERING THE LATE FILING OF FIVE PRIOR REPORTS?
The Firm also asserted that by publicizing the
sanctions, the NASD was imposing an “extra penalty” meant to
punish the Firm for rejecting the MRVP settlement offer.
The
SEC quickly dismissed that argument and noted that publicly available disclosure documents, such as Form BD,
which are routinely completed and updated by NASD members,
specifically require the disclosure of findings of rule violations
by, among others, NASD, “other than a violation designated as a
"minor rule
violation."
INABILITY TO PAY
SANCTIONS AND ADMINISTRATIVE COSTS
Finally, the Firm asserted an inability to pay the sanction imposed
by NASD and that it should not be required to pay the administrative
costs of the proceeding. It is well settled that a respondent bears the burden of
demonstrating the inability to pay and that NASD is entitled to make
a searching inquiry into any such claim. In support of this claim,
the Firm asserted that it must “put
money away so when business is bad [it] can survive,” but
did not submit any financial documentation detailing the Firm’s
situation, and Oppenheim’s own testimony demonstrates that the
Firm’s liquid assets substantially outweigh its liabilities. As to
the increased burden of the costs of the NASD administrative
process, the NASD informed the Firm of the potential increased
financial burden associated with proceeding to a hearing in lieu of
a disposition under the MRVP and specifically disclosed that the
failure to prevail at a hearing could result in the imposition of a
$750 administrative fee plus the cost of a hearing transcript.
The
SEC concluded that the Firm has not satisfied its burden of
demonstrating its inability to pay, and also rejected its claim
about the administrative costs.
The SEC Decision
ORDERED
that the disciplinary action taken by NASD against E. Magnus
Oppenheim & Co., Inc. be, and NASD’s assessment of costs, be,
and they hereby are, sustained.
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