1) The Commission's Van Dusen Decision is Not Applicable
The NAC considered and rejected X's argument that its analysis in this matter was governed by the Securities and Exchange Commission's line of decisions beginning with Paul Edward Van Dusen, 47 S.E.C. 668 (1981).
Van Dusen enunciated the standards for NASD to apply in situations in which an individual is applying to re-enter the securities industry after previously having been subject to a permanent injunction and a bar by the Commission, with a right to reapply. In such situations, the Commission advised that, because it had already addressed the individual's misconduct through its administrative process and had chosen to impose certain sanctions for that misconduct, NASD should not again consider the individual's underlying misconduct when it evaluates a statutory disqualification application. The Commission stated that such applications for re-entry generally should be acted upon favorably, and that NASD should look only to:
1) whether the individual had engaged in intervening misconduct;
2) whether the prospective employer had any disciplinary history, and, if so, the nature of that disciplinary history; and
3) whether the supervisory structure proposed for the applicant was sufficient.
The Van Dusen analysis is limited, however, to matters involving an injunction and an accompanying administrative order by the Commission with regard to the underlying statutorily disqualifying misconduct. Here, NASD's Department of Enforcement – not the Commission – was the entity that took action on the misrepresentations contained in X's Form U4 and amended Form U4 with Firm 1. Enforcement negotiated the AWC with X and had the option of proceeding with the action as a non-willful action, with no statutory disqualification consequences. Enforcement determined, however, to include a specific finding that X had engaged in willful misconduct when he placed the false information on the Form U4 in October 1999 and on the amended Form U4 in May 2000. Enforcement also included in the AWC the precise language that "X understands that this settlement includes a finding that . . . he willfully failed to disclose a material fact . . . and . . . he willfully misrepresented a material fact . . . and that . . . he is therefore subject to a statutory disqualification."
The AWC evidences the agreement of the parties that X would be subject to the full process ordinarily applied by NASD to statutorily disqualified individuals, which includes:
1) consideration of the nature and gravity of the disqualifying event;
2) the length of time that has elapsed since the disqualifying event;
3) any intervening misconduct;
4) other disciplinary history;
5) any other mitigating or aggravating circumstances that exist;
6) the precise nature of the securities-related activities proposed in the application; and
7) the disciplinary history and industry experience of both the member firm and the proposed supervisor.
The NAC also rejected X's argument that it would bee "punishing" him a second time by considering his AWC and the events leading to it in assessing the Application. Statutory disqualification cases are not the same as disciplinary cases. In contrast, a statutory disqualification proceeding is not a disciplinary action – with an attendant sanction – but is a process that allows a disqualified person to seek to associate with an NASD member firm in spite of the disqualification. In a statutory disqualification proceeding, NASD makes no determination that a statutorily disqualified individual has violated any rule. There is no adjudication of liability. NASD neither seeks nor intends punishment by denying an individual's re-entry into the securities industry.
The NAC concluded that the record raised serious questions as to X's integrity. X's initial wrongdoing – filing a false federal income tax return for 1981– was financially related and involved deceitful misconduct. In 1987, X pleaded guilty to a felony for that misconduct. Moreover, X's subsequent actions cause us to further question X's honesty. When X first entered the securities industry in October 1999 with Firm 1, he falsely represented on the Form U4 that he had never been charged with, or convicted of, a felony or a misdemeanor. When X was given the opportunity to correct this mistake in an amended Form U4 filing with Firm 1 in May 2000, he falsely represented that he had been charged with, and convicted of, a misdemeanor.
The record further demonstrated that at the same time that X was filing false Form U4 information with securities regulators, he was also making misrepresentations in numerous applications for insurance registration.
In September 1999, X replied "No" in a New York insurance registration application that asked if he had "ever been convicted in any criminal action."
In October 1999, he answered "No" in an application with an insurance company that asked if he had "ever been convicted of a felony, misdemeanor, DWI, etc."
In February 2000, he replied "No" on a Connecticut application for insurance registration that asked if he had "ever been convicted of or pled nolo contendere (no contest) to any felony or misdemeanor involving dishonesty or breach of trust."
In August 2000, he answered "No" when asked in a State 3 insurance registration application whether he had "ever been convicted, found guilty, or pleaded guilty or nolo contendere (no contest) to a felony" or "to a crime punishable by imprisonment of one (1) year or more."
Both State 3 and State 2 insurance regulators took action against X for these misrepresentations. In February 2002, State 3 placed him on probation for one year and fined him $1,500; in July 2002, State 2 fined him $500.
During this period when X was routinely answering "No" to questions about his criminal past, however, he answered "Yes" in January 2000 in a State 1 insurance application that asked if he had "been indicted or convicted of a crime, or convicted of a misdemeanor." X had no credible explanation for the discrepancy in his answers to these applications. At various times, he offered that he had been confused by the different language contained in each application, had "blocked" all thoughts about his conviction from his mind, had not appreciated the importance of full disclosure on licensing applications in a regulated profession, and had been unable to reach his former attorney (who was deceased) or one of his associates to determine whether the 1987 false tax return offense had been a felony or a misdemeanor. The NAC concluded that it was suspect for X to have answered correctly only on the State 1 application, given that he had been convicted by a federal court in that state, resided there, and did most of his insurance business there.
The NAC was also troubled by X's continuing inability to acknowledge his history of misrepresenting fac about his background to regulators. When asked by the Hearing Panel how many times he had incorrectly failed to admit to his felony conviction, X replied "Three times. State 3, State 2, and NASD." X did not admit, until specifically questioned by Member Regulation, that he had also supplied false information on an October 1999 application with an insurance company and on a February 2000 insurance registration application with State 4.
In addition to X demonstrated an inability to act responsibly and comply with established rules and regulations. In December 2001, Firm 1 initiated an internal review and placed X on "special supervision" when it discovered that NASD was investigating him for the Form U4 violations that led to the November 2003 AWC. In January 2003, Firm 1 terminated X for failing to follow "certain firm policies in regard to correspondence review and seminar review." A statutorily disqualified person must comply not only with the standard supervisory policies of his or her firm, but with heightened supervisory conditions as well. X's failure to comply with Firm 1's "special supervision" indicates that he may not be able to comply with heightened supervisory conditions placed on him if he were to be permitted to associate with the Sponsoring Firm.
Finally, X's disqualifying event – the November 2003 AWC – occurred very recently.