Michael F. Flannigan

UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934

Rel. No. 47142 / January 8, 2003

Admin. Proc. File No. 3-10530

ORDER SUSTAINING DISCIPLINARY ACTION TAKEN BY REGISTERED SECURITIES ASSOCIATION

On the basis of the Commission's opinion issued this day, it is

ORDERED that the disciplinary action taken by the National Association of Securities Dealers, Inc., ("NASD") against Michael F. Flannigan, and the NASD's assessment of costs, be, and they hereby are, sustained.

By the Commission.

Jonathan G. Katz
Secretary

Footnotes

¹ The NASD concluded that this conduct violated its Membership and Registration Rule 1031, and, accordingly, its Conduct Rule 2110. Rule 1031(a) states in pertinent part 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 in the category of registration appropriate to the function to be performed . . . ." Section (b) of Rule 1031 defines "representative" as a person associated with a member, who is engaged in the investment banking or securities business for the member. Conduct Rule 2110 requires members and their associated persons, in the conduct of their business, to adhere to high standards of commercial honor and just and equitable principles of trade.

² The NASD found that this conduct violated Conduct Rule 2510, and, accordingly, Conduct Rule 2110. Conduct Rule 2510 provides that "[n]o member or registered representative shall exercise discretionary power in a customer's account unless such customer has given prior written authorization to a stated individual or individuals," and the member has accepted the account, as a discretionary account, in writing.

³ Protective has not appealed the NASD's findings against it.

There were three additional respondents below, John J. Flynn ("Flynn"), Adam Galas ("Galas"), and David H. Shapiro ("Shapiro"). Flynn was registered with AGS as a general securities representative from October 1996 through June 1997. The NASD found that Flynn violated NASD rules by failing to create a record of instructions regarding trades in customers' accounts that he relayed to Protective. Flynn has not appealed the NASD's disciplinary action. The NASD ultimately dismissed, for lack of jurisdiction, its proceeding against Galas, who served as the president and a registered securities principal of AGS from January 1995 through December 1996, and as part-owner of AGS. Shapiro, a part-owner with Galas of AGS during the relevant period, who also served as a general securities representative of AGS, settled the NASD's action against him. With his consent, the NASD found that Shapiro, among other misconduct, received payment on behalf of AGS for the purchase of interests in the IPO at issue before the IPO effective date; failed to ensure that AGS personnel were registered with that firm before allowing them to engage in AGS' securities business; and participated in a course of conduct that allowed Flannigan, on behalf of Protective, to execute orders to purchase and sell securities in accounts opened at Protective for AGS customers, without written customer authorization.

⁴ Protective became an NASD member firm in April 1983. According to Flannigan, in March 2001, Protective ceased doing securities or any other type of business. The Commission terminated Protective's broker-dealer registration in May 2001.

⁵ A Form BDW was filed on behalf of AGS in April 1997; the Commission terminated AGS' broker-dealer registration in September 1998. The NASD canceled AGS' membership in June 1997.

⁶ See Securities Exchange Act Rule 15c3-1, 17 C.F.R. § 240.15c3-1.

⁷ Many of the AGS representatives in fact were not registered with AGS during the relevant period; a majority of the unregistered representatives were awaiting NASD approval of their registrations.

⁸ Shapiro testified that AGS' counsel prepared these letters.

⁹ Flynn testified that the AGS Letters were mailed in the middle of October; Flannigan concedes in his appeal brief that they were sent sometime before October 28, 1996.

¹⁰ The form letters stated that the customers had not been solicited for the Room Plus IPO. The testimony of AGS representatives establishes that solicitation in fact occurred.

¹¹ In his brief to the NASD's National Adjudicatory Council ("NAC"), Flannigan acknowledged that "[d]uring the three-day period following the effective date of the public offering, AGS representatives assisted Protective Group in confirming prior indications of interest."

¹² Indeed, Flanniqan conceded in his brief to the NAC (but now disputes in this appeal) that his (and Protective's) "reliance on representatives registered with AGS was misplaced, and result[ed] in a violation of [NASD] Rules 1031 and 2510."

¹³ Similarly, there is no record of Protective's written acceptance of any discretionary accounts.

¹⁴ Patricia H. Smith, 52 S.E.C. 346, 348-49 & n.9 (1995), quoting in part First Capital Funding, Inc., 50 S.E.C. 1026, 1029-30 (1992). See also L.B. Securities Corp., 42 S.E.C. 885, 889 (1966).

¹⁵ The Cambridge Group, Inc., 50 S.E.C. 752 (1991), modified sub nom., Hately v. SEC, 8 F.3d 653 (9th Cir. 1993) (president and executive vice president of NASD member firm violated NASD registration requirements by permitting unregistered person to solicit securities business). See generally First Capital Funding, Inc., 50 S.E.C. 1026 (1992) (president of NASD member firm found to have directly violated NASD requirement that no NASD member firm permit an unregistered person to engage in the firm's securities business); Gary D. Cohee, 48 S.E.C. 917 (1987) (upholding NASD finding that principal of NASD member firm improperly permitted unregistered person to engage in the securities business of firm).

¹⁶ Compare Michael Brian Kormos, 52 S.E.C. 303 (1995) (registration required to solicit and effect, or cause to be effected, securities transactions); see also First Capital Funding, 50 S.E.C. at 1029 (registration required to solicit investors in private offering and to distribute pre qualification forms); Voss & Co., Inc., 47 S.E.C. 626 (1981) (firm registration required to take orders from firm customers for corporate securities).

¹⁷ See Clinton Hugh Holland, Jr., 52 S.E.C. 562, 566 n.20 (1995) (violation of other NASD conduct rules constitutes violation of NASD Conduct Rule 2110, because such rule violations establish that the violator has engaged in unethical conduct), aff'd, 105 F.3d 665 (9th Cir. 1997) (Table).

¹⁸ Flannigan did not raise to the NAC the matter of evidentiary sufficiency. Instead, he asserted that his "appeal [was] not about the facts, but rather, about the sanctions that were imposed." Given our de novo review obligation, wedecline the NASD's suggestion that we disregard Flannigan's arguments about factual sufficiency in his application for review, and conclude that he has not waived his right to dispute the findings. We nonetheless take this opportunity to urge respondents and their counsel in self-regulatory organization ("SRO") disciplinary proceedings to make timely sufficiency-of-the-evidence arguments before the SRO.

¹⁹ Confirming or "firming up" indications of interest after the registration statement becomes effective is a integral part of the sale of an IPO security. Armstrong, Jones and Company, 43 S.E.C. 888, 899, n.28 (1968), aff'd sub nom Armstrong Jones and Company v. SEC, 421 F.2d 359 (6th Cir. 1970).

²⁰ 50 S.E.C. 752 (1991).

²¹ Flannigan also attempts to excuse his reliance upon the instructions of AGS' representatives for aftermarket trades by analogizing to a practice in the securities industry called the "institutional pot." This practice refers to an IPO allocation mechanism utilized by institutional customers

to assist institutions whose size requirements could not be met by any one underwriter and who were often forced to call all of the underwriters in the account and process multiple trade allocations . . . . The pot provides a mechanism whereby institutions may call the lead manager and attempt to fulfill their needs with minimal processing requirements.

Capital Markets Handbook, Securities Industry Association, Section 5.08 (Bruce S. Foerster ed., 1999). Flannigan's analogy is misplaced: in "institutional pot" situations, no allocations are made by the lead manager without that entity's direct contact with the institutional customer and approval from that customer. In the case before us, Flannigan executed trades in customers' accounts based solely on instructions of a non-authorized third party, without contacting the customers or obtaining from those customers prior written authorization to rely on those instructions.

²² 15 U.S.C. 78s(e)(2).

²³ Donald R. Gates, Exchange Act Rel. No. 41777 (Aug. 23, 1999), 70 SEC Docket 1228, 1236 and cases cited there. Accordingly, we reject Flannigan's attempt to parse another disciplinary matter, Cambridge Group, with a view todemonstrating that those assertedly "much more severe facts" resulted in a lesser fine, and to have us compare the bar here with the sanctions imposed in two other matters -- a Commission administrative proceeding finding a failure to supervise, and a NASD registration violation case.

²⁴ Stephen J. Gluckman, Exchange Act Rel. No. 41628 (July 20, 1999), 70 SEC Docket 418, 427 and cases cited there.

²⁵ We have previously found that a respondent's reliance on the advice of counsel may mitigate sanctions. See Joseph G. Chiulli, Exchange Act Rel. No. 42359 (January 28, 2000), 71 SEC Docket 1544, 1554 n.26. However, a cognizable claim of reliance on advice of counsel requires a showing that the party claiming it made a complete disclosure to independent counsel, sought advice as to the legality of his conduct, and relied on that advice in good faith. See, e.g., Markowski v. SEC, 34 F.3d 99, 104-05 (2d Cir. 1994); Arthur Lipper Corp. v. SEC, 547 F.2d 171, 181-82 (2d Cir. 1976).

²⁶ See NASD Sanction Guidelines (1998 ed.) at 8-9 (Principal Considerations in Determining Sanctions).

²⁷ The NAC related that Flannigan previously was censured and fined on at least two separate occasions: in 1994, for charging excess commissions, and in 1996, for offering and selling unregistered securities, and violating the net capital rule and rules governing "part or none" securities offerings, and the deposit of investor funds in an escrow account during a contingency period.

²⁸ Flannigan testified that one of the reasons he agreed to the arrangement was because he expected to generate a profit for Protective.

²⁹ In reaching this conclusion we have taken into account Flannigan's appeal statement that "he [has] learned that relying on the accuracy of information provided by AGS was unjustified."

³⁰ See NASD Sanction Guidelines at 41-43, 78 (range recommended for violations of Rules 1031 and 2110 is between $2,000 and $50,000; range for violations of Rules 2510 and 2110 is $2,000 to $10,000). We reject Flannigan's contention that, since Protective no longer exists, it is unfair to require that he pay the fine imposed jointly and severally on him and the firm. The NASD chose to fashion the fine as a joint and several fine, and we see no basis for finding that it is excessive or oppressive simply because Protective no longer can contribute a share.

³¹ See NASD Sanction Guidelines at 41-43, 78 (bar recommended for individuals or a bar for a supervisory principal, particularly where associated person knowingly violates the NASD's registration requirements; suspension of 10 to 30 business days recommended for egregious violations of exercise of discretion rule).

³² We reject as without any record support Flannigan's claim that the sanctions here reflect that he is being penalized for contesting and appealing the NASD's action. The sanctions imposed are appropriately remedial.

We have considered all of the parties' contentions. We reject or sustain these contentions to the extent that they are inconsistent or in accord with the views we express here.