1. Introduction

I have been engaged by Claimants’ Law Firm, San Diego, California, 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 issues involving registration requirements and supervisory obligations.

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.  For purposes of this preliminary report, it is assumed that the factual assertions referenced in the underlying Amended Statement of Claim are true and correct.

  1. Examination & Analysis Of Issues
  • Issues
  1. Whether Consulting Person violated NASD registration requirements based upon the nature of the conduct in which he engaged while acting on behalf of Boutique BD following execution of the underlying Consulting Agreement.
  2. Whether Boutique BD violated NASD registration requirements based upon the nature of the conduct in which Consulting Person engaged while acting on behalf of Boutique BD following execution of the Consulting Agreement.
  3. Whether Boutique BD violated NASD supervisory requirements by virtue of the relationship it maintained with Consulting Person following execution of the Consulting Agreement, taking into account the nature of the conduct in which Consulting Person engaged while acting on behalf of Boutique BD, along with the character of the oversight measures Boutique BD
  • Results Of Examination & Analysis
  • Conclusions & Opinions
  1. Based on the nature of the conduct in which he engaged while acting on behalf of Boutique BD following execution of the Consulting AgreementConsulting Person violated NASD registration requirements.
  2. Based on the nature of the conduct in which Consulting Person engaged while acting on behalf of Boutique BD following execution of the Consulting AgreementBoutique BD violated NASD registration requirements.
  3. Based on the relationship Boutique BD maintained with Consulting Person following execution of the Consulting Agreement, and taking into account the nature of the conduct in which Consulting Person engaged while acting on behalf of Boutique BD, along with the character of the oversight measures Boutique BD employed, Boutique BD violated NASD supervisory requirements.
  4. Rationale Associated With Conclusions & Opinions
  • Rationale – Evidentiary Considerations

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

Execution Of Consulting Agreement

  1. On or about January 1, 2005, Boutique BD entered into a Consulting Agreement with Enumerated Entity, referred to therein as “Consulting Firm.” As specified in the text of that Consulting AgreementBoutique BD then served as a broker-dealer registered with the U.S. Securities & Exchange Commission pursuant to Section 15 of the Securities Exchange Act of 1934.  At the time the Consulting Agreement was executed, Boutique BD was also a member of the NASD (n/k/a FINRA).  See Consulting Agreement, at 1, paragr. 2.
  2. According to the Consulting Agreement, the Consulting Firm desired to provide Boutique BD with “specialized consulting services,” including “the development of strategies for attracting new brokerage customers, enhancing the profile of Boutique BD among certain persons and institutions that Boutique BD determines to be appropriate prospective brokerage customers of Boutique BD and assisting in the development and improvement of various investment products . . . .” Consulting Agreement, at 1, paragr. 3.[1]
  3. The Consulting Agreement expressly authorized the Consulting Firm to “identify or refer to Boutique BD certain individuals and institutions that Boutique BD may be interested in soliciting to become brokerage customers of Boutique BD or to enter into specific transactions . . . through Boutique BD . . . .” Consulting Agreement, at 1, paragr. 4.
  4. With respect to the issue of control, the Consulting Agreement empowered Boutique BD to establish and specify the rules and standards governing the affairs of the Consulting Firm. In that regard, the Consulting Agreement made the Consulting Firm subservient to Boutique BD by stressing its obligation “to perform the Services in a manner consistent with the instructions and requests of Boutique BD . . . .”  Consulting Agreement, at 2, part 2(a).[2]  In accordance with the text of that provision, the Consulting Agreement further referenced a need for the Consulting Firm to conduct its affairs “in a manner consistent with . . . all statutes, laws . . . regulations, rules or requirements of any government, governmental authority, regulatory agency or self-regulatory body . . . having jurisdiction over the Consulting FirmBoutique BD or the Prospective Customers.”
  5. Given the applicability of licensing and registration requirements, the Consulting Agreement placed a blanket prohibition on the Consulting Firm in the solicitation area. To that end, the Consulting Agreement provided that “Boutique BD will be solely responsible for the solicitation . . . of any new Boutique BD customer accounts and the solicitation of . . . any orders from . . . Prospective Customers . . . .”[3] Consulting Agreement, at 2, part 2(b).
  6. As an additional matter, in recognition of the fundamental importance of supervisory considerations, the Consulting Agreement specifically addressed that issue. In doing so, the Consulting Agreement treated Boutique BD and Consulting Firm as completely distinct entities, each of which maintained its own separate and distinct set of supervisory obligations.  As a means of delineating these supposed independent responsibilities, the Consulting Agreement stated as follows: “Boutique BD and the Consulting Firm shall each be solely responsible for ensuring that their respective activities hereunder are in accordance with the Applicable Laws and Regulations and shall each be solely responsible for supervising the activities of their respective . . . ‘Associated Persons.’”  Consulting Agreement, at 2, part 3.
  7. In the wake of a sub-heading titled “Relationship Between The Parties,” the text of the Consulting Agreement cast the Consulting Firm as “an independent contractor and not an Associated Person of Boutique BD” Consulting Agreement, at 3, part 6.  The ensuing verbiage further built upon these concepts by declaring that the Consulting Firm’s Associated Persons do not “have any authority to represent that the . . . Consulting Firm’s Associated Person’s are Associated Persons of Boutique BD, and any such representation, if made, shall not bind Boutique BD.” [4]
  8. Page four of the Consulting Agreement referenced a series of affirmations appearing under the sub-heading “Representations and Warranties of the Parties.” The Consulting Firm endorsed and adopted the first collection of commitments.  In that regard, the Consulting Firm represented, inter alia, that: its activities will be “in compliance with all Applicable Laws and Regulations” “throughout the duration of the Agreement;” and asserted that no Consulting Firm personnel “are subject to a ‘disqualification’ as defined in Section 3(a)(39) of the Exchange Act or under NASD rules.”  Consulting Agreement, at 4, part 9(a).[5]  Boutique BD thereafter tendered similar assurances.  Id., at part 9(b).
  9. Page five of the Consulting Agreement reflects an arbitration clause. Pursuant to that provision, the parties “agree[d] to submit any dispute between them for decision by [securities] industry arbitrators pursuant to the NASD Code of Arbitration Procedure . . . .” Consulting Agreement, at 5, part 11.
    • Rationale – Legal & Regulatory Considerations

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

NASD By-Laws, Rules & Standards

  1. Pursuant to NASDR By-Laws, Article 1, Section (z), the term “‘person associated with a member’ or ‘associated person of a member’ means: (1) a natural person who is registered or has applied for registration under Rules of Association; (2) . . . a natural person engaged in the investment banking or securities business who is directly or indirectly controlling or controlled by a member, whether or not any such person is registered or exempt from registration with the NASD under these By-Laws or the Rules of the Association . . . .”
  2. Consistent with NASD Rule 0115(a), the rules of the NASD shall apply to all members and persons associated with a member. Persons associated with a member shall have the same duties and obligations as a member under these Rules.
  3. As provided for in NASD Rule 0121, “[u]nless the context otherwise requires, or unless otherwise defined in these Rules, terms used in the Rules and interpretative material, if defined in the NASD By-Laws, shall have the meaning as defined in the NASD By-Laws.”
  4. As specified in IM-1000-3, “[t]he failure of any member to register an employee, who should be so registered, as a Registered Representative may be deemed to be conduct inconsistent with just and equitable principles of trade and when discovered may be sufficient cause for appropriate disciplinary action.”
  5. NASD Rule 1031(a) provides that “[a]ll persons engaged or to be engaged in the investment banking or securities business of a member who are to function as representatives shall be registered as such with NASD in the category of registration appropriate to the function to be performed as specified in Rule 1032.”
  6. NASD Rule 1031(b) states, in pertinent part, that “[p]ersons associated with a member . . . who are engaged in the . . . securities business for the member including the functions of . . . solicitation or conduct of business in securities . . . are designated as representatives.”
  7. In accordance with NASD Rule 1032(a)(1), “[e]ach person associated with a member who is included within the definition of a Representative in Rule 1031, shall be required to register with the Association as a General Securities Representative and shall pass an appropriate Qualification Examination before such registration may become effective unless his actions are so limited as to qualify him for one or more of the limited categories of representative registration specified hereafter.”
  8. 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.”
  9. 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 ”

SEC Decisions & Pronouncements

  1. More than a decade ago, the SEC was called upon to address the issue of whether the “independent contractor” designation carried any weight within the securities industry context. Leaving no room for misapprehension, the Commission unequivocally stated that it “does not recognize the concept of ‘independent contractors’ for purposes of the Exchange Act.”  In re William V. Giordano, Exchange Act Release No. 36742, at 11 (January 19, 1996).  Given the manner in which this observation has been so solidly reiterated, there can be no doubt as to its continuing application.  See Exchange Act Release No. 44992, at 48-49 n. 18 (October 30, 2001) (stating that with respect to independent contractors involved in the sale of securities who are not registered as broker-dealers, they are “‘controlled by’ the broker-dealer, and therefore, are associated persons of the broker-dealer”); (examining authority wherein it was “found that the independent contractor was an ‘associated person’ of the firm . . . ” and then specifying that “[a] similar analysis would be applicable to consultants . . . ”) (emphasis added).  See also Exchange Act Release No. 52176 n. 7 (July 29, 2005) (reiterating the Commission’s “longstanding position that the designation of independent contractor has no relevance for purposes of the securities laws”); SEC Guide to Broker-Dealer Registration, Division of Market Regulation (August 2004) (reminding readers that the SEC does “not differentiate between employees and other associated persons for securities law purposes”); In re Raymond James Financial Services, Initial Decision Release No. 296, at 64 n. 71 (September 15, 2005) (deeming independent contractor status of person at issue to be of no relevance).[6]

FINRA Decisions & Pronouncements

  1. As demonstrated by the teachings of Department of Enforcement v. Magellan Securities, OHO No. C3B010016 (December 30, 2002), the NASD places a construction upon the phrase “associated person” which is in harmony with the approach taken by the SEC. To that end, the Magellan decision references the SEC’s Giordano opinion for the proposition that an “independent contractor” designation is of no significance.  Utilizing that SEC pronouncement as a springboard, the Magellan opinion thereafter notes that the NASD “[s]imilarly . . . does not distinguish between the supervision of representatives who are employees and those who are independent contractors.”  Magellan, at 10.  See also NASD NTM 98-38, at 3 n. 3 (May 1998) (concluding that “[i]ndependent contractors under the control of a broker or dealer are considered associated persons for purposes of the NASD By-Laws and Rules.”).
  2. In Department of Market Regulation v. Yankee Financial Group, NAC No. CMS030182 (August 4, 2006), the NASD addressed the relationship between registration principles and the requirement that NASD member firms control the conduct of their associated persons by discharging the supervisory responsibilities incumbent upon them. However, prior to embarking upon an in depth analysis of that area, the NAC spoke in more general terms.  In doing so, it brushed off claims that a broker-dealer might insulate itself from liability by pointing to the “independent contractor” status of those who engaged in the underlying offense conduct.  In this regard, the NAC found such assertions to be “antithetical to the whole purpose of the broker-dealer registration and supervision requirements.”  Yankee Financial, at 25.  The NAC then proceeded to stress that “[t]hrough their duty to supervise, broker-dealers are required to control the activities of their . . . associated persons.    For purposes of expounding upon these standards, the NAC further stated that “natural persons who want to engage in a securities business must either register as a broker-dealer or associate with a broker-dealer that is registered.  This scheme essentially mandates that natural persons engaged in a securities business be associated with a registered broker-dealer that is required to supervise them and that is accountable for failing to do so.  Id.  In an apparent attempt to emphasize the depth of its conviction, the NAC brought closure to this aspect of its opinion by emphasizing that “[t]here is no third, ‘independent contractor’ option that allows either the broker-dealer or its registered representatives to circumvent or negate the registered broker-dealer’s supervisory duties or its obligation to control its representatives.”  Id. See also DBCC v. Respondent 1, NAC No. C3A970026, at 8-9 (January 26, 1999) (rejecting “implicit assertion” that “supervisory responsibilities were somehow lessened because . . . the Registered Rep was designated as an independent contractor.”).
    • Rationale – Application Of Law To Facts

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

Representations & Assertions Made By Consulting Person

  1. As further described in the Amended Statement of Claim that has been filed in connection with this matter, Consulting Person told Claimant I that he was selling the Pertinent Securities on behalf of Boutique BD. As part of an effort to induce Claimant I to purchase the
    Pertinent Securities
    Consulting Person directed a series of remarks toward the attributes and features of that investment product. In this regard, Consulting Person asserted, inter alia, that there had been only one payment deferral since inception of the product; he then went on to discuss the projected rate of return, along with liquidity issues. Amended Statement of Claim, at 4-7.
  2. With respect to Claimant IIConsulting Person made his standard sales pitch, which likewise resulted in the sale of the Pertinent Securities. Turning toward Claimant III, the two men dined at a Famous Restaurant.  In describing the Pertinent Securities which served as the focal point of the presentation, Consulting Person claimed that they were similar to a program he had designed at Previous Employer.  Consulting Person further assured Claimant III that the Pertinent Securities carried a rating of either A+ or A. Amended Statement of Claim, at 8.

Functions Performed Are Determinative

  1. Viewed within the context of the pivotal regulatory standards and pronouncements governing the offer and sale of securities, careful inspection of the statements Consulting Person made to these investors is crucial. When embarking upon this task, little weight need be placed on the precise occupational designation Boutique BD assigned to Consulting Person.  Consistent with the teachings of the National Adjudicatory Council, “‘[a] registration determination . . . does not depend on the individual’s title, but rather on the functions that he or she performs.’” Department of Enforcement v. Sterling Scott Lee, NAC No. C06040027 (February 12, 2007), quoting, NASD NTM 99-49 (June 1999).  See also In re John Crute, Exchange Act Release No. 40474, at 7-8 (September 24, 1998) (concluding that “Crute’s status as an ‘associated person’ is not dependent on whether he was an ‘employee’ of” the broker-dealer; to the contrary, the activities in which he engaged “made him an associated person” of the firm); Hollinger v. Titan Capital, 914 F 2d 1564 (9th Cir. 1990) (analyzing control person provision of Exchange Act and rejecting arguments based on the “technical” classification of a registered representative as an “independent contractor”).  In the words of the SEC, “strict adherence to the registration requirement is essential;” it “provides an important safeguard in protecting public investors.”  In re Ashvin Shah, Exchange Act Release No 37954 (November 15, 1996)

Conduct In Which Consulting Person Engaged

  1. As described in greater detail in the Amended Statement of Claim, Consulting Person portrayed the Pertinent Securities at issue in an unduly optimistic, unbalanced light. While extolling the virtues of the Pertinent Securities, he directed a series of laudatory remarks toward key investment considerations, including the supposedly minimal prospects of default, superior liquidity and an attractive rate of return.  In framing the purported characteristics of the Pertinent SecuritiesConsulting Person went well beyond the threshold of the NASD registration requirements.  The hefty nature of the evidence on this front leaves little room for argument.  Indeed, registration would have been required even if Consulting Person had served as a mere telephone operator who did nothing more than accept completely unsolicited orders from the Claimants.  See FINRA: Qualifications; FAQ-Registration, at 4 (April 22, 2003) (specifying that if a telephone operator “accepts unsolicited orders from the firm’s customers . . . the operator must be registered.”).  Similarly, registration under NASD Rule 1031 served as an absolute necessity even if the conduct in which Consulting Person engaged had been designed to simply “pre-qualify prospective customers as to financial status and investment history and objectives.”  NASD NTM 00-50, at 2 (August 2000).  Taking things a step further, suppose Consulting Person maintained Series 6 registration with Boutique BD, with no Series 7 registration being in effect.  If such a scenario had been in place, Boutique BD would have carried an obligation to ensure that Consulting Person did “not conduct activities that would . . . require Series 7 registration, including, but not limited to, discussing the nature or details of particular stocks or bonds.”  August 11, 2000 NASD Staff Interpretive Letter to David Rappaport, Investacorp, Inc., at 2.  See also December 23, 1999 NASD Staff Interpretive Letter to Karen Steighner, Brokerage Administrators Corporation (responding to inquiry by noting that “[c]ollecting new account data is the type of function that may only be performed by Series 7 personnel.”)  Consulting Person’s failure to perform the full range of activities which may be handled by a given registered representative is inconsequential.  Pursuant to well established principles, NASD “member firms are required to register individuals whose activities on behalf of the firm constitute only a portion of registered representatives’ traditional dealings with customers . . . .”  DBCC v. Cannatella, NBCC No. C8A920075, at 25 n. 27 (October 12, 1994), citing, NASD NTM 85-48.  So tight and unyielding are the demands of the registration requirements that registration served as a necessity even if Consulting Person would have confined his conduct to confirming indications of interest,[7] or limited his commentary to basic attributes of a particular investment.  See NASD NTM 00-50.

Consulting Person Played Most Important Role

  1. On both a qualitative and quantitative level, it seems clear that Consulting Person served as the lead spokesperson of Boutique BD. At the “eleventh hour,” Purported Registered Rep ultimately arrived on the scene, but his role was largely mechanical.  Further, the evidence shows that even after Purported Registered Rep entered the picture, Consulting Person continued to dominate interactions with the Claimants.  The impact of these evidentiary points is inescapable.  They necessarily lead to the conclusion that Consulting Person served as a de facto associated person of Boutique BD.  See DBCC v. Deltavest, at 19 (stressing that individual’s contacts with specific customers – both old and new . . . provides strong support for a finding that he was acting as an associated person.”).

Ongoing Supervisory Lapses

  1. Establishing, maintaining and enforcing written supervisory procedures is a cornerstone of self-regulation within the securities industry. NASD NTM 98-96.  Succinctly put, supervision is a first line of defense for investor protection.  In re Paul C. Kettler, Exchange Act Release No. 34-31354 (Oct. 26, 1992).  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.” In re John Gutfreund, Exchange Act Release No. 34-31554, at 14 (December 3, 1992).
  2. Under the precise language embodied within the Consulting AgreementBoutique BD maintained the power to control Consulting Person’s conduct while he sought to “enhanc[e][ ] the profile of Boutique BD among certain persons and institutions . . . .” The terms of the Consulting Agreement, however, are not dispositive. Recognizing that the Consulting Agreement paved the way for Consulting Person to work on behalf of Boutique BD within the context of the highly regulated securities industry, Boutique BD would have possessed an immense level of control over Consulting Person even if the Consulting Agreement had been silent on that issue – despite his status as an independent contractor. Even “[s]o–called ‘independent contractors’ are in fact controlled by their broker-dealer employers.”  In re Meritquest Group, Exchange Act Release No. 31647, at 4 (December 23, 1992).  Given the depth of the responsibilities broker-dealers shoulder in the supervisory arena, they possess ‘“effective control over the representative at the most basic level.’”  , quoting, Hollinger v. Tital Capital, 914 F.2d 1564, 1574 (9th Cir. 1990). Included among the supervisory responsibilities Boutique  BD held was the obligation to ensure that Consulting Person did “not conduct activities that would require registration.”  June 6, 2001 NASD Staff Interpretive Letter to Newton Scholt, Jr., PIMCO Funds, at 3.  See also NASD NTM 85-48, at 2 (advising member firms “to review the activities of unregistered personnel having contact with existing or potential public customers to assure that their functions do not require registration . . . .”).
  3. Notwithstanding Consulting Person’s lack of registration, it was readily apparent that the Claimants had been induced to purchase the Pertinent Securities prior to the time at which Purported Registered Rep entered the mix. Clearly, these circumstances 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 22 (July 28, 2006), citing, Consolidated Investment Service, Admin. Proc. File No. 3-8312 (December 12, 1994). Faced with these developments, it was incumbent upon Boutique BD supervisors to confer with the Claimants in order to “get to the bottom of things.”  See In re Quest Capital Strategies, Exchange Act Release No. 44935, at 6 (October 15, 2001); In re 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 and characterizations of a registered representative were insufficient even if he had spent “many years in the business without incident”).  The off-site locations from which Consulting Person worked served to further heighten the level of diligence Boutique BD supervisors were required to display. , at 9 (stressing that “[b]oth the Commission and NASD Regulation have long stressed the importance of supervision of off-site representatives.”).
  4. 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).

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 [1] Boutique BD embarked on this arrangement even though the NASD had previously advised member firms “to review the activities of unregistered personnel having contact with existing or potential public customers to assure that their functions do not require registration . . . .” NASD NTM 85-48, at 2.

[2] From a vicarious liability perspective, a proper analysis must be trained on the issue of whether Boutique BD maintained the power to control the actions of Consulting Person  and the Consulting Firm.  See Department of Enforcement v. L.H. Ross & Company, OHO No. CAF040056, at 16 (January 14, 2005) (noting that questions of liability stemming from respondeat superior considerations “turn[ ] on whether the principal has the right to control how the person’s work will be performed” (emphasis added).  See also Department of Market Regulation v. Yankee Financial Group, NAC No. CMS030182, at 18 (August 4, 2006) (specifying that “[t]he SEC has defined control as ‘the power to direct . . . the management and policies of a person . . . by contract or otherwise’”(emphasis added)).

[3] The following sentence states that “Boutique BD will be responsible for the . . . making of any representations . . . regarding the terms . . . or merits of . . . investments available by or through Boutique BD.”  Consulting Agreement, at 2, part 2(b).  Notwithstanding the similarities between this language and the verbiage reflected in the predecessor sentence, the two provisions do not parallel one another.  As previously noted, the preceding sentence states that “Boutique BD will be solely responsible for the solicitation . . . of any new Boutique BD customer accounts and the solicitation  . . . of any orders from . . . Prospective Customers . . .” (emphasis added).  Id.  Viewed in that light, an ambiguity arguably attends the second sentence; it does not expressly vest exclusive authority within Boutique BD with respect to the making of representations “regarding the terms . . . or merits of . . . investments available by or through Boutique BD.”  Id.



[4] While addressing these points, the Consulting Agreement makes no express or implicit reference to apparent agency principles or like concepts.


[5] At the time Boutique BD executed the Consulting Agreement, it carried an obligation to act in accordance with Article V, Section 1 of the NASD By-Laws.  As specified in the text of that provision, NASD member firms are prohibited from “permit[ing] any person associated with the member to engage in the investment banking or securities business unless the member determines that such person . . . is not subject to a disqualification under Article III, Section 4,” which encompasses situations where, inter alia, an individual is the subject of a bar or suspension from association with a member firm.  “Firms have an obligation to determine whether prospective personnel, including persons who are not required to be registered, are subject to a disqualification under
Article III, Section 4.”  FINRA Regulatory Notice 07-55, at 2 (November 2007).  Regardless of whether Boutique BD fully discharged this investigatory requirement, the contractual arrangement presented heightened dangers on this front.  Given the extent to which the Consulting Agreement permitted Consulting Person to “fly under the radar,” it operated so as to significantly diminish the likelihood of regulatory detection; and thereby exposed investors to an enhanced level of potential harm.  See DBCC v. Deltavest Financial, NBCC No. C02930042, at 20-21 (June 27, 1994) (finding consulting contract to be a “ruse” which allowed “barred individual” to act as an associated person while “expos[ing] the firm’s customers to great risk and circumvented regulatory provisions”).

[6] While linking investor protection issues to compliance with registration requirements, the SEC has observed that “[t]he requirement of NASD approval of registration before a member’s employee may engage in dealings with the public serves a significant purpose in the policing of the securities markets and in the protection of the public interest, and strict adherence to it is essential.”  In re L.B. Securities Co., Exchange Act Release No. 7806, at 9 (January 28, 1966).  See also In re Patricia Smith, Exchange Act Release No. 35898, at 6 (June 27, 1995) (noting that the application of “the NASD’s registration requirement, ‘provides an important safeguard in protecting public investors’”); cf. Person’s Deemed Not To Be Brokers, Exchange Act Release No. 20943, at 2 (May 9, 1984) (finding that by virtue of the Securities Exchange Act of 1934, “[i]nvestors are assured that registered broker-dealers and their associated persons have the requisite professional training and that they must conduct their business according to regulatory standards”); Id., at 10 (observing that even the most robust disclosures appearing within a prospectus will not “protect investors unless the securities are sold by a salesman who understands and appreciates both the nature of the securities he sells and his responsibilities to the investor to whom he sells.’”).


[7] See In re Michael Flannigan, Exchange Act Release No. 47142, at 9-10 (January 8, 2003) (finding violation of NASD Rule 1031, in that, unregistered persons confirmed indications of interest in connection with an IPO).