January 1, 2009

1. Introduction

I have been engaged by Law Firm ABC in connection with the captioned matter.  Pursuant to the aforementioned engagement, I have been asked to analyze and evaluate the facts and circumstances associated with this proceeding, and then articulate opinions with respect to pertinent topics, including the following: whether Prestigious Brokerage Firm (“Prestigious Firm”) properly discharged its supervisory responsibilities; and whether Prestigious Firm should be held accountable for the damages sustained by Dr. Trusting (“Dr. Trusting”), an elderly Prestigious Firm customer,  given the nature of the conduct in which Slippery Smooth (“Smooth”) engaged while acting as a Prestigious Firm registered representative.

The opinions expressed herein are based upon factual and evidentiary items appearing in the materials I have reviewed in connection with my analysis and evaluation of this matter.  To the extent I review additional materials and take the information reflected therein into account, a course of action I expect to pursue, it may become necessary for me to modify or amend my opinions.  I reserve the right to modify or amend the opinions I have formed, and which are expressed herein, in the event I review additional materials relating to this proceeding.

1. Examination & Analysis Of Issues

• Issues

1. Whether Prestigious Firm properly discharged its supervisory responsibilities.
2. Whether Prestigious Firm should be held accountable for the damages sustained by Dr. Trusting, given the nature of the conduct in which Smooth engaged while acting as a Prestigious Firm registered representative.

• Results Of Examination & Analysis
• Conclusions & Opinions

1. Prestigious Firm failed to properly discharge its supervisory responsibilities.
2. Prestigious Firm should be held accountable for the damages sustained by Dr. Trusting, given the nature of the conduct in which Smooth engaged while acting as a Prestigious Firm registered representative.
3. Rationale Associated With Conclusions & Opinions

• Rationale – Evidentiary Considerations

Evidentiary and factual considerations taken into account in forming these conclusions and opinions include the following:

1. Early in 2006, Dr. Trusting was forced to endure a momentous surgical procedure addressing life threatening kidney problems. In that regard, he was forced to undergo a kidney transplant, which was followed by an agonizing, lengthy recovery period.  During the recovery stage, Smooth seized upon the opportunities at hand; he presented Dr. Trusting with a splendid investment proposal.  Operating in tandem with Billy Boswell, Smooth described a solid business venture on which Prestigious Firm had supposedly “signed off.”  Under the scenario Smooth outlined, the underlying investment proceeds would be dedicated toward a South Dakota corporation and an affiliated financing company.  According to Smooth, high grade success was a virtual certainty.  His in depth understanding of the area, combined with Boswell’s marked expertise, served as a stellar recipe for an impressive stream of profits.  As an added bonus, Smooth also noted that his sister would help run the business.[1]
2. Feigning loyalty, Smooth stressed the manner in which he and his Prestigious Firm colleagues had always looked out for the welfare of Dr. Trusting and his family. In doing so, they had skillfully shepherded the Trustings through the array of complexities surrounding the financial decision-making process.  Consistent with the portrayals Smooth constructed, it was essential that Dr. Trusting continue to display a high level of trust and confidence in Prestigious Firm.  By virtue of the dedication, commitment, loyalty and expertise he and his Prestigious Firm colleagues had so artfully demonstrated month after month, year after year, they were entitled to the respect and recognition they had earned.  In accordance with their track record, they had always taken care of him.  Without a doubt, they would continue to do so in the future.
3. Under the circumstances, it is virtually certain that Smooth fully appreciated the fictitious, bad faith character of his representations. Contrary to the portrayals Smooth crafted, Prestigious Firm had not placed its imprimatur on the investment scenario he enthusiastically outlined.  Notwithstanding the manner in which Smooth had so convincingly cast Prestigious Firm in a key role while accenting its purported approval, the firm maintained little or no connection to the endeavor Smooth touted.  But, as Smooth well knew, Dr. Trusting would be inclined to “take a pass” if the truth became known.  Consequently, from Smooth’s perspective, concealment and suppression were of paramount importance.  In simplistic terms, Smooth served as a “middleman.” With an eye toward promoting the potential for his scheme to remain intact, Smooth undoubtedly sought to minimize substantive dialogue between Dr. Trusting and his Prestigious Firm peers, lest the true state of affairs become known.  Coming at it from another direction, Smooth almost certainly endeavored to confine discussions between Dr. Trusting and Prestigious Firm associated persons to routine items, the likes of which were far-removed from his South Dakota business initiatives.  Succinctly put, wide-ranging conversation could easily imperil the scheme he envisioned.
4. While apparently exuding a marked level of audacity, Smooth followed up on his sales presentation by putting his plan into action. To that end, he initiated efforts to separate Dr. Trusting, elderly and infirm,[2] from his savings through a series of out-going wire transfers.  As part of this scheme, Smooth put his knowledge of Prestigious Firm’s operational and supervisory systems to use.  During the period of April 10, 2006 through August 10, 2006, Prestigious Firm made nine wire transfers, the sum of which exceeded $500,000, as evidenced by an internal schedule prepared by firm personnel.[3]  In accordance with the initial entries appearing at the top of that schedule, which is not of an exhaustive nature, the first wire transfer was effected on April 10, 2006.  Prestigious Firm No. 013666.  Through that conveyance, Prestigious Firm sent $100,000 to “Invisible Corp.,” an outside business to which it knew Smooth was connected.[4]  See also Prestigious Firm Activity Search Report, Prestigious Firm No.s 013667-013672, at 4 of 6 (evidencing “wired funds sent” to “Invisible Corp.” on April 10, 2006, several weeks after a limited collection of key Prestigious Firm employees had been apprised of Smooth’s affiliation with that entity).[5]
5. Throughout the course of this process, Smooth undoubtedly recognized the need for ongoing, internal supervisory examination and inspection of the pertinent Prestigious Firm documents triggering each of the underlying conveyances.[6] However, Smooth inexplicably exhibited a marked level of carelessness over a broad expanse of time.[7]  By way of example, Smooth knew that near the end of March 2006, various Prestigious Firm personnel had “signed off” on a written outside business request[8] tying him to Invisible Corp., Round Hill, South Dakota.[9]  But as previously noted, Smooth bungled his own scheme by thereafter arranging for the conveyance of Dr. Trusting’s funds to Invisible Corp.   In addition, Smooth routinely “messed up” by tendering for approval Prestigious Firm wire transfer requests between Dr. Trusting and a supposedly independent, unaffiliated third party – while perplexingly agreeing to personally assume the burden of paying the corresponding wire transfer fees.  Moreover, as the end of 2006 drew near, Smooth further undermined his goal of secrecy.  Specifically, he submitted for supervisory approval a Prestigious Firm wire transfer request, wherein he arranged for another $30,000 of Trusting funds to be directed to that same hamlet, Round Hill, South Dakota.[10]  See December 5, 2006 Prestigious Firm Outgoing Wire Transfer Request Form, Prestigious Firm No. No. 013598.  For one reason or another, the submission of that wire transfer request apparently triggered an “exception report” pursuant to Prestigious Firm’s “Compulsory Alerts” system.  Although this compliance “tool” called for resolution of the “issue” that had arisen, there is no evidence that any meaningful action was taken. See December 5, 2006 Prestigious Firm Compulsory Alerts, Prestigious Firm No. 013597.  Accordingly, Prestigious Firm went ahead and forwarded the $30,000 at issue, for the benefit of “Dr. Trusting and Betty Boswell 123 East Main Street Round Hill, SD.”  Prestigious Firm Outgoing Wire Transfer Request Form, Prestigious Firm No. 013598.
6. With the passage of time, Smooth provided Prestigious Firm supervisory and compliance personnel with still more records linking him to Round Hill, South Dakota.  Puzzlingly, however, it seems that this clumsy display of ineptitude continued to go unnoticed.  One “red flag” after another was waived off; and no meaningful inquiries were directed toward Smooth.  To appreciate the ongoing depth of Prestigious Firm’s deficiencies, one need only make an expedited, superficial examination of the seemingly perfunctory approvals Prestigious Firm managers conferred upon Smooth in February 2007.  Through his submission of official Prestigious Firm outside business applications, Smooth further accented the depth of the problems swirling about his activities.  Unfortunately, the signals he communicated fell upon “deaf ears.”  Pursuant to an outside business request relating to his ownership of a “start up” restaurant purportedly located at “713 Silver St. Round Hill, SD,” Smooth cast a palpable sense of darkness upon Prestigious Firm’s previous wire transfers to Round Hill, South Dakota.  In that filing, Smooth articulated another series of seemingly irreconcilable positions, and thereby placed himself in a more irresponsible, reckless light.  Among other things, through this request, Smooth characterized himself as the “owner” of Cool Beans Cafe, but he thereafter shifted course by claiming that he did not actually “own shares in the company[].”  While there is room for debate as to the precise motivations Smooth harbored when he disavowed ownership, it seems that his employment of this machination allowed him to skirt an obligation to complete the “Private Security Transaction” forms.  Regardless, it appears that Prestigious Firm managers yielded to Smooth’s outside business request even though he tacitly confessed to further transgressions contemporaneous with his submission of this document, in that, he placed the “start [of his] . . . relationship with this outside entity[]” in November 2006, which appears to be well in advance of the date on which tendered that application.  See Cool Beans Cafe Outside Business Interests Application, Prestigious Firm No.s 009405-009407.[11]
7. From a totality of the circumstances perspective, it seems clear that Prestigious Firm personnel exhibited little competence. The exercise of elementary logic suggests that embryonic “start up” enterprises (such as Cool Beans Cafe’) are often in need of capital; and given Smooth’s express acknowledgment that he was “responsible for [the] monthly expenses,”[12] of that business, Prestigious Firm’s failure to “connect the dots” cannot be readily appreciated.  On a realistic level, however, the firm did not merely play the role of a “sleeping giant.”  Various Prestigious Firm employees actively facilitated the looting that occurred.  For instance, Prestigious Firm personnel sent, via the firm’s own facsimile machine, a $100,000 “Invisible Corp., Round Hill, SD” Promissory Note.[13]  Viewed against the backdrop of the responsibilities the firm then maintained with respect to the review of correspondence, it is difficult to comprehend the dynamics that were in place; rational explanations appear to be out of reach.
   2. Rationale – Legal & Regulatory Considerations

Legal and regulatory considerations taken into account in forming these conclusions and opinions include the following:

NASD Rules & Standards

1. NASD Rule 2110 serves as a broad, elastic catch-all provision. The text of that rule states as follows:  “A member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade.”
2. Pursuant to NASD Rule 3010(a), each NASD member firm “shall establish and maintain a system to supervise the activities of each . . . associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with the Rules of this Association.  Final responsibility for proper supervision shall rest with the member.”
3. NASD Rule 3010(b) requires each member firm to “establish, maintain and enforce written procedures to supervise the types of business in which it engages and to supervise the activities of registered representatives, registered principals and other associated persons that are reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable Rules of NASD.”
4. Consistent with NASD Rule 3030, “[n]o person associated with a member in any registered capacity shall be employed by, or accept compensation from, any other person as a result of any business activity, other than a passive investment, outside the scope of his relationship with his employer firm, unless he has provided prompt written notice to the member . . . Activities subject to the requirements of Rule 3040 shall be exempted from this requirement.”
5. NASD Rule 3040 is comprised of numerous subparts, several of which are referenced herein. The far-reaching verbiage appearing within the rule begins with subparagraph (a),  which provides that “[n]o person associated with a member shall participate in any manner in a private securities transaction except in accordance with the requirements of this Rule.”  As specified in subparagraph (b) of the rule, “[p]rior to participating in any private securities transaction, an associated person shall provide written notice to the member with which he is associated describing in detail the proposed transaction and the person’s proposed role therein . . . .”  Further, in a situation where the member firm “approves a person’s participation in a transaction . . . the transaction shall be recorded on the books and records of the member and the member shall supervise the person’s participation in the transaction as if the transaction were executed on behalf of the member.”[14]

SEC & NASD Decisions & Pronouncements

1. Government authorities, along with the NASD, have long played a fundamental role in the oversight of the securities industry. Handicapped by resource limitations, but endowed with hefty levels of common sense, regulators have historically recognized that, standing alone, they could scarcely begin to effectively police the vast operations of so many broker-dealers.  To that end, they have traditionally sought to achieve their objectives, at least in part, by compelling registered securities firms operating under their jurisdiction to shoulder significant, on-going supervisory responsibilities.  The weighty obligations that have been placed upon securities firms in this regard have operated so as to leverage the resources of these regulators, the effect of which has engendered a greater sense of safety and integrity, thereby heightening investor confidence in the capital markets.  See SG Cowen Securities Corp., Release No. 34-48335 (Aug. 14, 2003), citing, Smith Barney, Harris Upham & Co., Release No. 34-21813 (March 5, 1985) (recognizing “that the ‘responsibility of broker-dealers to supervise their employees by means of effective, established procedures is a critical component in the federal investor protection scheme regulating the securities markets’”).  See also Donald T. Sheldon, Exchange Act Release No. 31475, 52 SEC Docket 3826, 3855 (November 18, 1992), aff’d. 45 F.3^rd 1515 (11^th Cir. 1995) (finding that “[i]t is critical for investor protection that a broker establish and enforce effective procedures to supervise its employees”).
2. Securities industry regulators have repeatedly stressed the need for member firms to exercise an intense level of vigilance while assessing their respective supervisory procedures, while also requiring strict enforcement of those procedures. From the NASD’s perspective, “[e]stablishing, maintaining and enforcing written supervisory procedures is a cornerstone of self-regulation within the securities industry.”  NASD NTM 98-96.  Further, “[t]he Commission has long emphasized that the responsibility of broker-dealers to supervise their employees is a critical component of the federal regulatory scheme.”  John H. Gutfreund, Release No. 31554  (1992).  See also Connecticut Capital Markets, Exchange Act Release No. 50034, at 4 (July 16, 2004).  Succinctly put, supervision is a first line of defense for investor protection.  Paul C. Kettler, Release No. 34-31354 (Oct. 26, 1992).  See also NASD NTM 99-45 (observing that “the ‘responsibility of broker–dealers to supervise their employees by means of effective, established procedures is a critical component in the federal investor protection scheme regulating the securities markets.’”).
3. Based on well established principles which have consistently been espoused by the SEC, “[i]t is not sufficient for a broker dealer to establish a system of supervisory procedures which rely solely on supervision by branch managers.” Prudential-Bache Securities, Inc., Exchange Act Release No. 22755, 48 S.E.C. 372, 400 (1986).  Moreover, to the extent supervisory responsibilities are placed upon front line personnel, sufficient funds must be budgeted for these tasks, with efforts also being made to insure that these responsibilities are being properly discharged.  See Mabon, Nugent & Co., Exchange Act Release No. 19424, 26 SEC Docket 1846, 1852 (Jan. 13, 1983) (noting that securities firms must “provide effective staffing, sufficient resources and a system of follow up and review to determine that any responsibility to supervise delegated to compliance officers, branch managers and other personnel is being diligently exercised.”).
4. Recognizing that an entity such as broker-dealers may act only through its employees and agents, “[t]he Commission has long held the position “that a broker-dealer may be sanctioned for the willful violations of its agents through [common law principles of agency]’” (brackets in original). Raymond James Financial Services, Initial Decision Release No. 296, at 65 (September 15, 2005). On a parallel note, “corporations, including broker-dealers, have frequently been held liable for the actions of lower-level employees.”  Id., at 64.  Similarly, the NASD has likewise provided member firms with little protection on the liability front.  Specifically, while discussing issues of control person liability, the NASD has alluded to a lack of harmony on the “culpable participation” front.  But after considering the mix of pertinent factors, the NAC voiced its support for the majority view, concluding that a member firm may be deemed liable under this principle regardless of whether the complaining party establishes “scienter or culpable participation.”  Department of Market Regulation v. Yankee Financial Group, at 21 (NAC August 4, 2006).  In disseminating these teachings, which effectively provide for the application of strict liability principles, the NAC also voiced a “fall back” position, wherein it concluded that if the need for a showing of culpability might be inferred, the requisite standard would be satisfied through, inter alia, a mere showing that “the controlling person failed to review or check information that he or she had a duty to monitor” (emphasis in original).  Id.
   3. Rationale – Application Of Law To Facts

The application of pertinent regulatory and legal standards to the facts of this proceeding reveals the following:

1. The mission of the NASD encompasses the regulation of the “securities markets for the ultimate benefit and protection of the investor.” NASD Manual, 151 (April 2000).  Due to the hefty responsibilities shouldered by financial industry professionals, along with NASD member firms employing them, the NASD has consistently “set the bar high” while stressing the marked level of diligence and conscientiousness owed to customers.  To this end, the NASD has instructed financial industry professionals as follows: “You have a legal and moral obligation to place the interests of your customers above all else, particularly your own financial interests.”  Registered Representatives & Other Securities Industry Professionals, at 20 (2000).

14. Consistent with the text and the spirit of numerous disciplinary decisions that have been handed down in recent decades, supervisory deficiencies and customer harm routinely accompany one another. As such, “the supervisory obligations imposed by the federal securities laws require a vigorous response even to indications of wrongdoing.  Many of the Commission’s cases involving a failure to supervise arise from situations where supervisors were aware only of ‘red flags’ or ‘suggestions’ of irregularity, rather than situations where, as here, supervisors were explicitly informed of an illegal act.” John Gutfreund, Exchange Act Release No. 34-31554, at 14.  “Moreover, once a supervisor learns that a registered representative has engaged in misconduct, the representative cannot be retained unless he or she is subjected to enhanced supervision” (emphasis added).  Quest Capital Strategies, Exchange Act Release No. 44935, at 6 (October 15, 2001).  See also Consolidated Investment Services, Exchange Act Release No. 36687 (January 15, 1996) (finding need for heightened supervision when a registered representative has previously engaged in “misconduct”).

67. Smooth’s attachment to Prestigious Firm gave him “substantial credibility;” by virtue of the position he held, Smooth “was able to use his status and title as a representative of a major broker-dealer” so as to abuse the faith and trust Dr. Trusting placed in him. See Raymond James Financial Services, at 67.  As a registered broker-dealer, Prestigious Firm maintained “‘effective control over the representative [Smooth] at the most basic level.’” See Meritquest Group, Exchange Act Release No. 31647, at 4 (December 23, 1992), quoting, Hollinger v. Titan Capital Corp., 914 F. 2d 1564, 1574 (9th Cir. 1990).  Unfortunately Prestigious Firm repeatedly “dropped the ball” and failed to exercise the control it held.  In that regard, the “record reveals a substantial abdication of supervisory responsibility.”  Quest Capital Strategies, Exchange Act Release No. 44935, at 6 (October 15, 2001).

1. The circumstances at issue in this proceeding would have served as unmistakable “red flags” in the eyes of the most average, pedestrian supervisors. However, even if these “red flags” went entirely undetected, marked supervisory failures nonetheless occurred. See Department of Enforcement v. Ronald Pellegrino, OHO No. C3B050012, at 23 (July 28, 2006), citing, Consolidated Investment Service, Admin. Proc. File No. 3-8312 (December 12, 1994).[15]  Faced with these developments, it was incumbent upon Prestigious Firm supervisors to confer with Dr. Trusting in order to “get to the bottom of things.”  See Quest Capital Strategies, at 6 (admonishing Respondents for demonstrating supervisory laxities, stating “[w]e have repeatedly stressed that supervisors cannot rely on the unverified representations of their subordinates”); Sandra Logay, Exchange Act Admin. Pro. File No. 3-8969, at 21-22 (January 28, 2002) (finding that a proper supervisory inquiry could not be limited to firm personnel); DBCC v. Respondent 1, at 6-7 (concluding that the unverified assurances of a registered representative were insufficient even if he had spent “many years in the business without incident”).  In a nutshell, Prestigious Firm supervisory and compliance personnel carried an unyielding obligation to put “two and two together” by taking note of Smooth’s affiliation with Invisible Corp. and his other Round Hill, South Dakota business pursuits, while at the same time being mindful of the Trusting wire transfers to Invisible Corp. and other Round Hill, South Dakota initiatives; Smooth’s incomplete, contradictory and incongruous outside business “disclosures;” Smooth’s status as a “rule breaker;” and Smooth’s perplexing willingness to pay the wire transfer fees associated with conveyances that were actually contrary to his functions as an “asset gatherer.”
2. Qualifications, Credentials And Education

In December 1986, I earned an LL.M. (Securities Regulation) from Georgetown University Law Center.  I received my J.D. from the William Mitchell College of Law in June 1985, graduating “with honors” and in the top 5% of my class.  I obtained a B.S. from the University of Minnesota, Carlson School of Management, in August 1981.

After completing my graduate legal studies in the securities law area, while at the same time serving as a tutor of first and second year law school students at Georgetown, I began working as a regulator of the securities industry.  Specifically, in February 1987, I became an attorney for the U.S. Securities & Exchange Commission (Division of Enforcement).  Initially, I worked for the SEC in the Southwest Region.  During my first year of service, I received the highest performance evaluation rating of any attorney in the office.  Additionally, my graduate thesis on securities law, which I had written while attending Georgetown, was published by the Texas Tech Law Review, Texas Tech University, where it was named “Best Article of the Year” by the Texas Tech Law Review editorial staff.

Following my first year of service as a regulator of the securities industry, I transferred to the SEC, Division of Enforcement, Washington, D.C.  While serving as an SEC attorney in Washington, D.C., I received the highest performance evaluation rating of any attorney in the branch to which I was assigned.  On another occasion, I received the highest possible performance evaluation rating.  Additionally, I was selected as the only attorney to represent the SEC, Division of Enforcement, in connection with the Washington, D.C. American Inns of Court program.  During my term of service at the SEC headquarters in Washington, D.C., I also co-authored an article on securities law which was published as a lead article by the West Virginia Law Review, West Virginia University.

In October 1989, I became an Assistant U.S. Attorney, District of Minnesota.  During my tenure with the U.S. Attorney’s Office, I was assigned to many cases involving securities law and financial matters generally. While serving as a U.S. Department of Justice attorney, I received sustained superior performance and civil servant of the year awards.  As a result of achievements in the securities law area, I also received commendations from the Director of the Federal Bureau of Investigation and the Director, U.S. Securities and Exchange Commission, Division of Enforcement, along with federal and state law enforcement agents.  Based upon my performance, together with my knowledge of securities law, I was given primary responsibility over some of the most significant cases within the District of Minnesota involving securities/business matters.

In September 1996, I joined the NASD, Division of Enforcement, District 6 (Texas) as Senior Regional Attorney and was thereafter promoted to Regional Counsel.  While serving as an NASD attorney, Division of Enforcement, I was asked by both the Office of the Solicitor General, U.S. Department of Justice, and the U. S. Attorney’s Office, District of Minnesota, to serve as a Special Assistant United States Attorney on securities law cases.  After being asked to serve as a Special Assistant U. S. Attorney on securities law proceedings, I worked on appellate matters relating to United States v. O’Hagan, which I had prosecuted in its entirety, then briefed and argued before the Eighth Circuit Court of Appeals.  I also provided advice and expertise to various federal prosecutors who were working on high profile cases involving alleged violations of the federal securities laws.

During my term of service at the NASD, I was selected to serve on the subcommittee which prepared the NASD Sanction Guidelines (the sole representative of District 6); and I also wrote an article relating to securities law, which was published as the lead article in Volume 59 of the Louisiana Law Review, Louisiana State University.  While working in a regulatory capacity at the NASD, I maintained oversight responsibilities with respect to the securities industry and I initiated, or participated in, formal disciplinary proceedings against numerous NASD member firms, along with registered representatives and supervisory personnel who were associated with those brokerage firms.  Sanctions imposed in connection with these disciplinary actions related to a wide range of offenses, including failure to supervise, the maintenance of inadequate written supervisory procedures, private securities transactions, outside business, conversion, improper use of customer funds, fraud and deception, misleading advertising, recordkeeping violations, registration violations, trade reporting, and the violation of just and equitable principles of trade.  Based on the organizational structure which was employed at the NASD, my responsibilities went far beyond the analysis and prosecution of securities industry activities which served as a basis for formal disciplinary actions; I regularly served as a de facto supervisor of NASD supervisory personnel who oversaw the work of NASD examiners.  During the period in which I served as a regulator at the NASD, I made a series presentations to members of the securities industry, along with those involved in the representation of NASD member firms, and addressed federal securities law issues, NASD rules, and official pronouncements of the NASD.

In October 2000, I entered private practice with Shepherd & Smith, which shortly thereafter was renamed Shepherd, Smith & Bebel.  While practicing in the securities law area and working on cases throughout the nation, I also served as a securities litigation consultant to the U.S. Department of Justice and was retained as a consulting and testifying expert by a trustee of the Securities Investor Protection Corp. in a case against Bear, Stearns Securities Corp.  As an additional matter, I was appointed to the Council of the Houston Bar Association Securities Law Section.

In February 2004, I joined Sacks, Bebel & Boll, PLLC, and then in August 2004, I started my own law firm, Christopher Bebel, Esq. P.C.  While practicing at Christopher Bebel, Esq. P.C., I continued to focus on matters involving securities law.  Further, I continued to serve on the Council of the Houston Bar Association Securities Law Section, and at the same time served as the Chairperson of the Membership Committee of the Public Investors Arbitration Bar Association (“PIABA”), a national organization comprised of attorneys representing investors in securities law proceedings.  Following the time at which I formed my own law firm, I accepted an invitation to serve on the Advisory Board of the Corporate Compliance Center, South Texas College of Law, Houston, Texas; and thereafter became a member of the Securities Experts’ Roundtable.

I have lectured on securities law to students at approximately one-half dozen law schools and graduate degree programs, including Baylor University School of Law, Texas Tech University School of Law, William Mitchell College of Law, University of Houston School of Law, and the University of Dallas.  I have also lectured on securities law issues at conferences and seminars hosted by the U.S. Securities & Exchange Commission and the Texas State Securities Board; NASD; State Bar of Texas; South Texas College of Law; U.S. Attorney’s Office, Northern District of Texas; FBI Academy; Dallas Bar Association; Houston Bar Association; PIABA; and PLI (Practising Law Institute).  As an additional matter, I have also served on the Advisory Board to the Texas Tech Student Managed Investment Fund.

My publications include the following:

• A Detailed Analysis of United States O’Hagan: Onward Through the Evolution of the Federal Securities Laws, 59 La. L. Rev. 1 (1998);
• State Takeover Laws, Insider Trading, and the Interplay Between the Two: A New Perspective, 91 W. L. Rev. 1001 (1989) (co-authored);
• Why the Approach of Heckman v. Ahmanson Will Not Become the Prevailing Greenmail Viewpoint; Race to the Bottom Continues, 18 Tex. Tech. L. Rev. 1083 (1987) (named Best Article of the Year by the Texas Tech Law Review editorial staff); and
• Effective Supervision, Investor Confidence and Capital Formation, Practicing Law Institute, Corporate Law and Practice, Securities Arbitration 2006, Vol. 2, 95 (2006) (co-authored).

My legal commentary and analysis has been featured in Time Magazine, Fortune Magazine, U.S. News & World Report, Wall Street Journal, Washington Post, New York Times, Los Angeles Times, Chicago Tribune, Dallas Morning News, Houston Chronicle, USA Today, Detroit Free Press, American Lawyer, Kiplinger’s Personal Finance, Christian Science Monitor, National Law Journal, Texas Lawyer, International Herald Tribune, Agence France Presse, National Post of Canada, Financial Times of Germany, Australian Financial Review, Montreal Gazette, The Times of London, The Financial Times of London, Chicago Sun Times, St. Louis Post-Dispatch, Boston Globe, Seattle Times, Bloomberg News, Dow Jones Newswires, Corporate Counsel, Associated Press, Reuter’s, New York Post, New York Newsday, Orlando Sentinel, Pittsburgh Post Gazette, San Francisco Chronicle, Minneapolis Star Tribune, American Banker, Legal Times, and numerous other publications.

My legal interpretation and analysis has also been highlighted on NBC’s Today Show, NBC’s Nightly News Tonight, CBS’ The Early Show, CBS’ Nightly News, ABC’s World News Tonight, CNBC, MSNBC, CNNfn, Public Television’s Nightly Business Report, Fox News Channel’s Your World With Neil Cavuto, Bloomberg Television, Bloomberg Radio, National Public Radio’s All Things Considered, National Public Radio’s Morning Edition, National Public Radio’s Marketplace, National Public Radio’s Weekend Edition, CBS Marketwatch, The Street.com, Forbes.com, BBC Television, BBC Radio, BBC Online, CBS radio, and numerous other media outlets.

[1] Regrettably, Smooth opted to refrain from noting that his sister was a convicted felon.

[2] Being mindful of Dr. Trusting’s personal characteristics, Prestigious Firm managers carried heightened oversight responsibilities.  “An investor’s age and life stage are critical components of an investor’s profile and firms cannot meet their regulatory obligations without considering these factors . . . [and] older investors may also be more frequent targets for financial abuse.”  Protecting Senior Investors: Compliance, Supervisory And Other Practices Used By Financial Services Firms In Serving Senior Investors, at 3 (September 22, 2008).  See also Id, at 1 (observing that “securities regulators have long focused on the senior population and its particular vulnerability to fraud and abuse”).

[3] This internal schedule is incomplete.  It does not capture the full expanse of time during which Dr. Trusting was deceived.  Nor does it list all of the Prestigious Firm wire transfers that were made.

[4] As set forth on the face of this Prestigious Firm “Outgoing Wire Transfer Request Form,” the beneficiary of this conveyance (i.e., “Invisible Corp”) was located at “715 Silver Street, Round Hill, SD.” Prestigious Firm Outgoing Wire Transfer Request Form, Prestigious Firm No. 014266.

[5] On that same day, April 10, 2006, Prestigious Firm also effected a $25,000 wire transfer to Billy Boswell.  The combined effect of these two April 10, 2006 wire transfers nearly depleted the Trusting account at issue; slightly more than $2,000 remained in that account in the wake of those distributions.

[6] As Smooth well knew, Prestigious Firm’s written supervisory procedures encompassed specific segments focusing on the need for supervisors to closely monitor the conduct of associated persons following the approval of an outside business activity request.  Situated within Prestigious Firm’s written supervisory procedures, beneath the title “Supervising Ongoing Outside Activities,” is a mandate which provides as follows: “Once an employee has received all necessary approvals, the manager is responsible for ongoing supervision of the employee to ensure that they (sic) do not conduct the activity in a manner which might adversely affect the firm.”  Prestigious Firm Written Supervisory Procedures, Prestigious Firm No. 011993.  In a situation where an associated person has received written authorization to engage in a private securities transaction, continuing oversight of the employee’s conduct in that area was likewise required.  On this front, Prestigious Firm’s written supervisory procedures specify that once an employee has received permission to engage in a private securities transaction, “the manager is responsible for ongoing supervision of the employee with regard to the investment.”  Prestigious Firm Written Supervisory Procedures, Prestigious Firm No. 011994.

[7] Inasmuch as a subtle supervisory spotlight had been placed on him by virtue of a November 2005 “Trade Adjustment Request,” the employment of common sense should have propelled Smooth to exhibit a heightened level of caution, but this did not occur.  See Trade Adjustment Request, Prestigious Firm No. 013882.  See also “Activity Report For The Month Ending 12/2005.”  Prestigious Firm No.s 009222-009224 (reflecting monthly “Turnover Rate” of 1.66 in an account maintained on behalf of Dr. Trusting’s son).

[8] Framed in a more precise light, Prestigious Firm characterized this corporate record as an “Outside Business Interests” application.  According to notations reflected on the face of that document, three Prestigious Firm personnel charged with compliance and oversight responsibilities approved Smooth’s request, with notice of such approval being forwarded to Smooth on March 27, 2006.  Inexplicably, such approval was freely bestowed upon Smooth even though the written statements he provided were contradictory, inconsistent and incomplete.  Along those lines, Smooth identified the outside business as “Invisible Corp,” of “Round Hill SD” (sic); and noted that he receives “Fees” as compensation, but Smooth then asserted that he “Never” receives compensation.  Moreover, in response to an adjoining inquiry asking, “[w]hat date did you/will you start your relationship with this outside entity?,” Smooth replied, “05/2005.”  See 2006 Outside Business Interests Application, at 3, Prestigious Firm No. 009396.  By noting that he had started his relationship with Invisible Corp., Round Hill, SD in May 2005, Smooth arguably told Prestigious Firm that he had engaged in conduct prohibited under NASD Rule 3030 for nearly a year, while at the same time violating the text and the spirit of Prestigious Firm’s own written supervisory procedures.  Early in 2007, Smooth drew even more attention to himself.  In that regard, he disavowed some of his March 2006 assertions by characterizing himself as an “Investor” in Invisible Corp., as opposed to a “Consultant.”  And, after he apparently realized the incongruous character of his assertion that he “Never” received compensation, Smooth opted for a more plausible response, wherein he represented that he receives compensation on a “Monthly” basis.  Additionally, when asked to describe his “activities, duties and responsibilities,” Smooth backed away from his previous representation that he was a “Consultant,” portraying his activities as non-existent (i.e., “None”).  See 2007 Outside Business Interests Application, at 2, Prestigious Firm No. 009403.  Curiously, however, it appears that Prestigious Firm personnel casually accepted the revised information even though it could not be squared with Smooth’s previous affirmations; and notwithstanding the notion that if Smooth truly was a passive investor, Rule 3030 was not even applicable.

[9] Based upon statistical and geographic information, it’s fair to say that Round Hill, South Dakota is more akin to a small hamlet than a sprawling metropolis.  See, e.g., Wikipedia Photo; “Downtown Round Hill,” attached as Exhibit.

[10] It appears that segments of another Prestigious Firm internal record trained upon Round Hill, South Dakota may have likewise been constructed on or about December 5, 2006.  Handwritten notations appearing on this internal document reference, inter alia, an address of “123 E Main St. Round Hill, SD.”  See Prestigious Firm Account Information System Output, Prestigious Firm No. 013603.

[11] Assuming Smooth failed to timely seek approval of this outside business activity, he violated applicable NASD rules, together with pertinent Prestigious Firm procedures, to which Smooth was required to strictly adhere.  See Edwin Kantor, 51 S.E.C. 440, 446 (May 20, 1993) (emphasizing the essential need for “‘strict adherence’ to internal company procedures”) (citation omitted).  See also Thomas J. Kocherans, Exchange Act Release No. 36556 (December 6, 1995) (noting that “[p]articipants in the securities industry must take responsibility for compliance with regulatory requirements . . .”); Department of Market Regulation v. Amr “Tony” Elgindy, OHO No. CMS00015 (December 28, 2001) (stating, “securities professionals . . . are part of a highly regulated industry and, as such, [they are] required to know the law that is applicable to their conduct within the industry.”). 

[12] Cool Beans Café Outside Business Interests Application, at 2, Prestigious Firm No. 009406.

[13] A “Personal Guarantee” in favor of Dr. Trusting accompanied this $100,000 promissory note transmitted from Prestigious Firm’s facsimile machine by Prestigious Firm personnel.  The names Betty Boswell, Billy Boswell, and Slippery Smooth appeared on these financial instruments.  See Prestigious Firm No.s 013571-013577.  As previously noted, Prestigious Firm forwarded Trusting monies to Billy Boswell and Betty Boswell on April 10, 2006 and December 5, 2006, respectively.  See Prestigious Firm No.s 013666; 013598.

[14] Through his updated disclosures discussing his involvement with Invisible Corp., Smooth arguably informed Prestigious Firm supervisory and compliance personnel that it was necessary to analyze his conduct under Rule 3040.  However, it appears that firm employees refrained from doing so.

[15] In accordance with the teachings articulated in Pellegrino, “[a] failure to supervise occurs when ‘red flags’ are evident and are . . . undetected, or [they] fail to cause reasonable concern.”  Pellegrino, at 23.  See also District Business Conduct Committee v. Corporate Securities Group, No. C3A960009, at 8 (concluding that supervisory obligations are violated when managerial personnel “overlook[] ‘red flags’ that indicate possible misconduct”); Royal Alliance Associates, Exchange Act Release No. 38174 (January 15, 1997) (rejecting defense arguments and determining that in a situation “where a firm’s compliance and supervision system is inadequate to discover the indications of problematic conduct, the personal responsibility for supervision cannot be fulfilled by a supervisor who is simply unaware of the indicators”); Bradford Titus, Exchange Act Release No. 38029 (December 9, 1996) (making failure to supervise findings notwithstanding steps taken by registered representative to conceal the improprieties in which he engaged).