RRBDLAW.com 917-520-2836: SEC Appeal Rooney A. Sahai Forgery Rule 8210 Unauthorized Trades NASD

Rooney A. Sahai entered the securities industry in 1986, and became associated with The Key Group, Inc. ("Key Group") in 1999, during which time he worked out of his home. In 1999 and 2000, Sahai was registered with Key Group as a limited representative - investment company and variable contracts products representative.

In 1998 or early 1999, Malcolm Coblentz, a physician, purchased health insurance from Sahai. Thereafter, Sahai visited Coblentz's office from time to time to discuss various investment products. In November 1999, Coblentz's medical malpractice provider, Medical International Insurance Exchange of New Jersey ("MIIX"), went public, and he received a stock certificate worth approximately $30,000. On December 3, 1999, Coblentz and his wife met with Sahai, and the doctor requested that Sahai liquidate the MIIX stock and use the proceeds to establish an IRA account. Coblentz agreed with Sahai's recommendation that the stock certificate proceeds be invested in American Skandia mutual funds.

The MIIX certificate was transferred to Bear Stearns, Key Group's clearing firm, and sold on December 16, 1999. By that time, its value had dropped $2,000. Coblentz testified that, in January 2000, he became concerned about the delays in liquidating the stock certificate and investing the proceeds at American Skandia. Coblentz's wife telephoned Bear Stearns to inquire about the delay and was informed that the firm had waited until Coblentz had signed and returned to Bear Stearns an IRS Form W-9, which had been sent to Sahai. The proceeds were held in a Key Group account at Bear Stearns and subsequently invested in an American Skandia account on January 11, 2000.

Coblentz didn't recall signing a Form W-9, and requested that Bear Stearns telefax to him a copy. Coblentz stated that the signature on the form was not his and that he neither instructed nor authorized anyone to sign the form for him.

Subsequently, he telephoned Sahai's office and requested that Deepa Patel, an administrative employee in Sahai's office, send him the documentation in his file. He received from Sahai's office a handwritten note stating, "Please invest the entire proceeds in my account at American Skandia. Thank you." ("Note One"). Coblentz admitted that his signature appears on Note One. At Sahai's request, he signed his name in the middle of a blank sheet of paper because he understood that Sahai would draft language reflecting Coblentz's "permission to transfer the stock document to American Skandia." Coblentz agreed that, although not in his handwriting, the text of Note One accurately reflected his investment intentions and objectives.

Coblentz also received a second handwritten note stating, "Please invest the entire proceeds in my account at American Skandia #736 26887. Thank you." ("Note Two"). Coblentz stated that he "believes" that Deepa sent him Note Two. Coblentz said that his handwriting does not appear on Note Two.

Coblentz stated that he did not sign the mutual fund application or authorize anyone to sign it on his behalf. He noted that the mutual fund application contains several errors, including an extra middle initial in his name and an incorrect mailing address. Coblentz's office telephone number was recorded in the space requesting his home telephone number. Coblentz said that his wife is the only person authorized to sign his name and stated that his wife did not sign his name to the Form W-9, Note Two, or the mutual fund application.

Sahai's Explanations

Sahai said he either had "no role" or minimal involvement with paperwork and that his clerical staff was responsible for processing paperwork, obtaining customer signatures, and other administrative tasks. During this period, he employed part-time high school and college students who remained with his office for only short periods of time. Sahai was the only registered representative in his office. Dawn Iorio, who was hired as full-time office manager beginning in February 2000, acknowledged that she had sole responsibility for processing customer applications.

Sahai denied that he had signed Note Two but was not sure whether his handwriting appeared on Note Two --- he admitted that the language authorizing the transaction was in his handwriting.

Between 1999 and 2002, Sophia Ikonomou worked as an administrative assistant for Coblentz. In November or December 1999, she was notified by a former employer of the planned termination of her retirement plan. Ikonomou asked Coblentz and his wife for the name of someone to reinvest the funds held in the retirement account, and they recommended Sahai. In December 1999, she spoke to Sahai by telephone and informed him that she wanted her retirement funds invested in "a traditional IRA." According to Ikonomou, she received by facsimile transmission from Sahai's office an American Skandia Advisor Funds, Inc. ("American Skandia") "Mutual Fund Individual Retirement Account (IRA) Application" ("1999 Mutual Fund Application"), which she partially completed, signed, and dated December 17, 1999. She returned the IRA application to Sahai, but she did not complete the section of the 1999 Mutual Fund Application entitled "Fund Selection" (and no funds are selected thereon) and that she never discussed fund selection with Sahai.

The NASD found that Sahai forged or caused the forgery of the the Form W-9, Note Two, and the mutual fund application for Coblentz; and the 2000 Mutual Fund Application and Annuity Application in Ikonomou's name.

In reaching that decision, the NASD largely credited the customers' testimony that they did not sign the allegedly forged documents. The NASD found that the forgeries violated Rule 2110 because they resulted in the misappropriation of customer funds or falsification of firm records. Donald M. Bickerstaff, 52 S.E.C. 232, 235 (1995).

Sahai admitted completing the dealer information on both the 2000 Mutual Fund Application and Annuity Application and writing the text of Note Two. Otherwise, he denied completing any of the alleged forged documents or signing Coblentz's or Ikonomou's signatures or authorizing anyone else to do so.

The SEC honed in on the NASD's reliance upon Coblentz's testimony as to his wife's conversation with Bear Stearns ---which was described as having three levels of hearsay:

Although hearsay could be admissible, the SEC noted that the NASD Hearing Panel was required to evaluate its probative value, reliability, and fairness of use.

In questioning the reliability of Coblentz's testimony, Sahai argued that the client was upset because he lost money in the liquidation of the MIIX stock and because Sahai refused to deposit Coblentz's stock certificate proceeds in an IRA. Sahai contends that he informed Coblentz that this transaction was impermissible. Sahai asserts that Coblentz persisted because he wanted to shelter his assets from bankruptcy. Coblentz and his wife in fact filed for bankruptcy in 2000. NASD acknowledged that animosity may have existed between Coblentz and Sahai, but still deemed the client's testimony sufficiently credible.

Taking all the facts into consideration, the SEC described each of the cited levels of offered hearsay to be "oral, unsworn, and uncorroborated," and concluded that the statements were neither reliable nor probative. Accordingly, the SEC was not able to find that Sahai forged or "caused" to be forged the customer signatures on the documents at issue, and set aside the NASD's finding of forgery.

The record established that Ikonomou instructed Sahai to open an IRA account for her and to purchase mutual funds in that account. Sahai admitted that Ikonomou wanted a mutual fund and, instead, a variable annuity was purchased for Ikonomou's account. Sahai admitted that the variable annuity transaction was a "mistake." Yet there is no record evidence that he initiated any steps to correct the error or to reduce any financial losses that Ikonomou might suffer due to the purchase of the annuity. A registered representative is obligated to follow the customer's instructions when effecting a security transaction for that customer's account. Sahai failed to do so.

Accordingly, the SEC affirmed the NASD's finding that Sahai caused the execution of a transaction that was not authorized by Ikonomou in violation of Conduct Rule 2110.

NASD found that Sahai failed to respond to the requests for information dated April 27 and May 14, 2001, concerning the source for the address that he provided for Haas, and Social Security numbers, payroll records, sources of payment, and employment applications for two other former employees. NASD also determined that Sahai's other responses to NASD's requests for information were "varied, evasive, and incomplete." Sahai agreed to search for the information regarding his former employees. Sahai provided the purported name and address for only one former employee in response to NASD's written requests dated March 19 and April 23, 2001.

In April 2001, Sahai, for the first time, informed NASD that he did not keep employee records, other than in a computer address book program that had "crashed" during the previous year. Iorio was unable to identify precisely when the computer "crash" occurred, but she thought it might have been in early 2001. Iorio confirmed that some information that was maintained in the computer also was maintained in paper files in the office. Iorio testified that, following the computer crash, she was unable to retrieve from the computer's database program certain personnel information (e.g., name, address telephone number, and date of birth), client information, or payroll records. Iorio stated that she attempted to re-create the database from paper back-up files but does not know whether the paper files included those of Sahai's former employees or encompassed all of the data that was lost as a result of the computer crash. Iorio noted that there was a copy of her W-4 in Sahai's office and that she previously had sent a copy of the W-4 to Sahai's accountant.

Sahai noted that he testified at length during his investigative testimony, as well as at the hearing. He asserted that he responded "to the best of his ability" to the inquiries about his former employees. However, the SEC concluded that Sahai did not respond at all to NASD's requests on April 27 and May 14, 2001 that he provide the source of the information about Haas' address, and the other requested information. Although Sahai had access to his accountant and bank (to obtain check records), there is no record evidence that he contacted either of them for information responsive to NASD's request. If Sahai could not readily provide the information that NASD requested, he had an obligation to explain, as completely as possible, his efforts and his inability to do so. Sahai also argued that his retention of counsel demonstrated his good faith efforts to provide the information requested by NASD. The SEC dismissed this argument by reiterating its position that it is the responsibility of an associated person to respond directly to the NASD's requests for information, and not the responsibility of counsel.

Although the SEC found that Sahai's failed to respond timely and fully to NASD's requests for information violated Rule 8210 --- the NASD barred Sahai for failure to provide the information it requested (an important distinction: doing something late and/or partially, versus not doing something at all). Sahai argued that the bar was excessive and inconsistent with NASD Sanction Guidelines. He argued that he did not ignore NASD's requests for information but responded on numerous occasions. The SEC seemed to agree that Sahai cooperated with certain NASD requests. Moreover, the SEC did not view the NASD's requests as simply reiterating from month to month the same allegedly unsatisfied demands. Clearly, the SEC believed that certain of those requests changed and expanded over the period at issue.

Once again, the SEC was upset at the state of the NASD's record of this matter. Although, the SEC agreed that Sahai had not timely/fully responded, it wasn't satisfied that he had unequivocally failed to provide information, which appeared to have been the basis for the imposition of the bar. Based on the record, the SEC could not assess the appropriateness of the bar imposed on Sahai in light of NASD's Sanction Guidelines, which, in pertinent part state: "If the individual did not respond in any manner, a bar is standard. Where mitigation exists, or the person did not respond timely, consider suspending the individual in any or all capacities for up to two years."

ORDERED that the sanctions imposed by NASD on Rooney A. Sahai in this proceeding be vacated; and that the proceeding be remanded to NASD for further proceedings.

2007 UPDATE: Pursuant to an SEC Decision (Securities Exchange Act Release # 55046 / January 5, 2007), the SEC only partially sustained the NASD's sanctions. Specifically, the SEC set aside the Bar from association with any NASD member in all capacities imposed by NASD and reduced that proposed sanction to a two-year suspension in all capacities. The SEC also imposed a fine of $5,000.