SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 40438 / September 14, 1998 Admin. Proc. File No. 3-9392 __________________________________________________ : In the Matter of the Application of : : JOSEPH PATRICK HANNAN : 630 South Masselin, Apt. 474 : Los Angeles, CA 90036 : : For Review of Disciplinary Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : __________________________________________________: OPINION OF THE COMMISSION REGISTERED SECURITIES ASSOCIATION -- REVIEW OF DISCIPLINARY PROCEEDINGS Violation of NASD Rules of Fair Practice Failure to Provide Requested Testimony Associated person of member firm failed to respond to association staff's request for an in-person interview. Held, association's findings of violation sustained, but sanctions imposed modified. APPEARANCES: Joseph Patrick Hannan, pro se. Norman Sue, Jr. and Francine Norz Tobin, for NASD Regulation, Inc. Appeal filed: September 3, 1997 Last brief received: December 2, 1997 I. Joseph Patrick Hannan, who, from November 1993 through April 1995, was employed as an unregistered administrative assistant by Columbus Financial, Inc. ("Columbus" or the "Firm"), a former member of the National Association of Securities Dealers, Inc. ("NASD") located in Beverly Hills, ======END OF PAGE 1====== California, appeals from NASD disciplinary action. <(1)> The NASD found that Hannan failed to respond to NASD staff requests for an in-person interview in violation of Article III, Section 1 (now Conduct Rule 2110) and Procedural Rule 8210 of the NASDRules of Fair Practice ("NASD Rules"). <(2)> Accordingly it ordered that Hannan be censured, fined $1,000, suspended from association with any member in any capacity for six months, and assessed $135 in District Business Conduct Committee ("District Committee") hearing costs. We base our findings on an independent review of the record. II. From November 1993 through April 1995, Hannan was employed by Columbus as an administrative assistant in its operations department. According to Hannan, he was paid $12 an hour. He arrived at the Firm at 6:00 a.m., answered telephones, opened and logged in Federal Express packages, took the packages to the operations manager, photocopied, and prepared a sales report, after which he left the office to attend classes. He was never registered with the NASD. Hannan subsequently resigned from Columbus and took a job outside the securities industry. Two months after Hannan left Columbus, the NASD began an investigation of the Firm and certain of its employees in connection with sales of limited partnerships. The purpose of the investigation was to determine whether any of the respondents had received undisclosed compensation from affiliates of the issuer of the limited partnerships. Hannan initially cooperated with the NASD examiner. It appears that Hannan spoke by telephone to the NASD examiner on several occasions shortly after he left the Firm. On June 6, 1995, however, the NASD examiner made a <(1)> Hannan's employment with Columbus made him a "person associated with a member" as defined in Art. I, Sec.(q) of the NASD's By-Laws (any natural person engaged in securities business who is directly or indirectly controlled by such member, whether or not any such person is registered or exempt from registration). The NASD does not allege that Hannan was required to be registered although they note that he took and twice failed the examination to become a registered representative. <(2)> Procedural Rule 8210 (formerly Article IV, Section 5 of the NASD's Rules of Fair Practice) requires persons associated with member firms to report orally with respect to any matter involved in an NASD investigation. Conduct Rule 2110 (formerly Article III, Section 1 of the NASD's Rules) requires members and their associated persons to observe high standards of commercial honor and just and equitable principles of trade. ======END OF PAGE 2====== ======END OF PAGE 3====== written request for Hannan to contact the examiner prior to June 16, 1995, in order to schedule a meeting. By letter dated June 9, 1995, counsel for Hannan responded and stated that Hannan would "continue to comply with any reasonable requested [sic] made of him." <(3)> By letter dated July 17, 1995, the examiner again asked Hannan to contact him to schedule a meeting "no later than July 31, 1995." The examiner noted that Hannan's counsel had represented that counsel "would contact this office on your behalf" in early July, but, as of the date of the letter, neither counsel nor Hannan had contacted the examiner. By letter dated September 11, 1995, the examiner again directed Hannan to appear to give testimony on September 25, 1995. Each of these letters was sent by both regular and certified mail. <(4)> The record also contains memoranda to the file from the examiner reporting several attempts to contact counsel and Hannan and reporting messages left for Hannan at home and at work, as well as on Hannan's pager. Hannan called the examiner on September 22 and, according to the examiner, left a message that "he doesn't know what we want, he doesn't think we need to speak with him further, and that he can't make [sic] testimony." The examiner offered to reschedule for October 2, 1995, but Hannan did not respond. The NASD staff determined to recommend disciplinary action. On November 21, 1995, the examiner again contacted Hannan and left a message for his attorney. At some point during this period, the examiner had prepared an affidavit for Hannan's signature. Hannan refused to sign the examiner's affidavit, and instead provided a substitute affidavit. <(5)> The examiner told Hannan that the statements in the draft declaration and the declaration that Hannan executed "were so different that the discrepancies had to be addressed." Hannan initially agreed to appear at 9:00 a.m. on November 22, 1995, but then called the morning of the 22nd to state that he would not appear. The District Committee issued a complaint on November 30, 1995 naming 13 respondents, the last of whom was Hannan, for failure to respond to the investigator's request for information. Hannan filed an answer to the complaint although he did not appear at the District Committee hearing. In his answer, he stated that he refused to execute the affidavit prepared by <(3)> The record also contains a June 14, 1995 letter from Hannan to his counsel authorizing counsel to "obtain/receive" documents from any third-party including the NASD and to speak on Hannan's behalf. Hannan reiterated his willingness to cooperate "without reservation." <(4)> Some of the certified letters were signed for by an individual, but the signatures are illegible. One was returned as unclaimed. <(5)> Neither version of the affidavit is in the record. ======END OF PAGE 4====== the examiner because it was "illiterately prepared, extremely vague, and fraudulent." Hannan further claimed that he was unable to appear for testimony before the NASD staff because he had started a new position and had no accrued leave time. Hannan stated that he had not signed for the certified letters but admitted that he received copies of the three letters sent by regular mail. He claimed that, after receiving each letter, he had contacted the examiner directly or through his counsel. He also asserted that he had no information about the sales practices at Columbus. He complained that he had been singled out and harassed by the examiner and did "not trust the ethics or motives" of the examiner. He offered to speak to any other NASD examiner. The District Committee assessed "the most severe sanction against" respondents "who chose not to comply" and censured Hannan, fined him $20,000 and barred him from association with any member in any capacity. Hannan, among others, appealed the District Committee's decision and appeared before the National Business Conduct Committee ("National Committee"). Hannan stated that he had been in Idaho at the time of the District Committee hearing in May 1996. He was permitted to appear and testify before the National Committee. Hannan explained to the National Committee that he did not feel comfortable signing the affidavit prepared by the examiner because he did not have first-hand knowledge of the activities of the Firm. Hannan also complained about the tactics used by the NASD examiner, which, he asserted, had led to his refusal to cooperate further with that examiner. <(6)> The NASD staff agreed that Hannan had provided some cooperation to the staff. The staff also stated that, unlike certain other respondents in the proceedings who were the subjects of the investigation, the staff had sought Hannan's testimony to help understand the activities at Columbus during the time of Hannan's employment. The National Committee considered the staff's explanation and further recognized Hannan's inexperience. It concluded that [a]lthough ignorance of the rules of Fair Practice is not an excuse for his violations, it appears that Hannan . . . did not fully understand his obligation as an associated person. . . . He thought he had given staff all of the information he could, and he did not have the ability to leave his job for an in-person interview. While these are not valid excuses for failure to respond to staff's request . . . , considering Hannan's past cooperation with the Columbus investigation, his continued contact with staff after its request for an in-person interview, his lack of culpability, and his lack of registration, we cannot conclude that a bar is appropriate in Hannan's case. <(6)> The NASD represented to the National Committee, although it was not in the record, that Hannan's allegations had been investigated and that its staff had acted appropriately. ======END OF PAGE 5====== Accordingly, the National Committee reduced the District Committee's sanctions to a censure, six-month suspension in all capacities, a $1,000 fine, and costs. III. Hannan states on appeal that he complied with every reasonable request of the NASD and is grateful that the National Committee reduced the sanctions. He contends, however, that the charges should be dismissed because they are false and unproven and have no merit. Hannan's refusal to comply with the NASD's requests that he appear and give testimony violated an important obligation imposed on NASD members and their associated persons. <(7)> We have repeatedly stressed the importance of cooperation in NASD investigations. We have also emphasized that the failure to provide information undermines the NASD's ability to carry out its self-regulatory functions. <(8)> Since the NASD lacks subpoena power, it must rely upon Rule 8210 in connection with its obligation to police the activities of its members and associated persons. Failures to comply are serious violations because they subvert the NASD's ability to carry out its regulatory responsibilities. <(9)> Hannan claims that what constitutes compliance "is vague and arbitrarily enforced." He seems to believe that he is charged with failure to comply because he "was unable to give the NASD the information they were seeking," information that he claims he does not have. We believe Hannan misperceives his failure. We do not understand the NASD to suggest that Hannan had any obligation to conform his testimony to some pre-determined model. Rather, Hannan had given the NASD information at various times that the NASD perceived to be conflicting. The NASD had the right to summon Hannan to appear and give the NASD whatever information he did have, which hopefully would resolve these discrepancies. We have previously held that, if an associated person cannot provide the information sought by the NASD, the associated person nonetheless has the obligation "to explain the deficiencies in his responses or answer as completely as he [is] able." <(10)> <(7)> See John J. Fiero, Securities Exchange Act Rel. No. 39544 (January 13, 1998), 66 SEC Docket 932. <(8)> See Fiero, 66 SEC Docket at 934; Mark Allen Elliott, 51 S.E.C. 1148, 1150 (1994); Richard J. Rouse, 51 S.E.C. 581, 584 (1993); Michael David Borth, 51 S.E.C. 178, 180 (1992). <(9)> John A. Malach, 51 S.E.C. 618, 621 (1993). <(10)> Robert A. Quiel, Securities Exchange Act Rel. No. 39056 (Sept. 11, 1997) 65 SEC Docket 1023, 1026-27. ======END OF PAGE 6====== Hannan also notes that the National Committee held that he had provided cooperation and a written statement to the staff and thus, in Hannan's view, found that he complied with his obligations under the NASD's Rules. While the National Committee found that Hannan's partial cooperation mitigated his subsequent refusal to appear for testimony, it is equally clear that it found that his cooperation did not excuse that subsequent failure. That finding is amply supported by the record. Hannan further asserts that he complied with every request until he was required to appear in "downtown Los Angeles" for a deposition. He asserts that his appearance would have caused him "financial hardship" because he did not have any accrued leave and was travelling for his job during this period. Hannan also states that he was never informed that he could testify by telephone. However, we have held that an NASD member may not "second guess" or "impose conditions on" the NASD's request for information. <(11)> The NASD was entitled to ask Hannan to appear before it to explain the perceived discrepancies in his statement. Hannan, moreover, was given several opportunities, directly and through counsel, to arrange a time or a method for appearance. He did not avail himself of these opportunities. Instead, Hannan repeatedly questioned the NASD's judgment in asking to speak to him and offered to cooperate only if he were assigned a new examiner. In doing so, he impermissibly attempted to substitute his judgment about whether he was a relevant person to be interviewed for that of the NASD examiner who was attempting to conduct an investigation. <(12)> Hannan, as a former associated person, had an obligation to make himself available and to provide whatever information he possessed to the NASD. Hannan renews his complaints about the examiner's attitude. He reiterates that he questioned the NASD's examiner's "intentions due to months of harassment and threats." <(13)> Hannan does not detail the <(11)> Robert A. Quiel, 65 SEC Docket at 1027; Brian L. Gibbons, Securities Exchange Act Rel. No. 37170 (May 8, 1996), 61 SEC Docket 2597, 2601; Richard J. Rouse, 51 S.E.C. at 585; Michael David Borth, 51 S.E.C. at 180. <(12)> Robert A. Quiel, 65 SEC Docket at 1027. <(13)> Hannan also claims that he never agreed to abide by the rules of the NASD. However, the fact that he was unaware of this obligation cannot excuse his non- compliance. See, e.g., Philip S. Sirianni, 47 S.E.C. 355, 359 (1980), aff'd, 677 F.2d 1284 (9th Cir. 1982). As an associated person of a member firm, he had the obligation to appear and give an oral statement. Procedural Rule 8210. (continued...) ======END OF PAGE 7====== nature of the examiner's harassment. Given the number of requests for Hannan's assistance and Hannan's unhelpful responses, we could understand that the examiner might feel or express a degree of frustration. In any event, such claims do not excuse Hannan's failure to appear. Hannan further states that he was out of the state for business "from December 1995 to September 1996." However, the record reflects a series of attempts by the NASD to secure Hannan's cooperation between June and November 1995. We cannot conclude that Hannan was unable to appear in "downtown Los Angeles" for over five months. <(13)>(...continued) In this regard, the NASD notes that Hannan twice took the examination to become a registered representative although he did not pass that examination. In connection with his examination he was required to execute a Form U-4 Uniform Application for Securities Industry Registration. Execution of the Form U-4 includes an undertaking to abide by all NASD requirements. ======END OF PAGE 8====== IV. Hannan asserts that the sanctions imposed in this matter are excessive. Upon review of the record, we note that Hannan was inexperienced and acted in an unregistered capacity at Columbus. Hannan further provided partial cooperation to the NASD staff. We have therefore determined to reduce the sanctions to a censure and a $500 fine. An appropriate order will issue. <(14)> By the Commission (Chairman LEVITT, Commissioners JOHNSON, HUNT, and UNGER); Commissioner CAREY not participating. Jonathan G. Katz Secretary <(14)> All of the contentions advanced by the parties have been considered. They are rejected or sustained to the extent that they are inconsistent or in accord with the view expressed herein. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 40438 Admin. Proc. File No. 3-9392 __________________________________________________ : In the Matter of the Application of : : JOSEPH PATRICK HANNAN : 630 South Masselin, Apt. 474 : Los Angeles, CA 90036 : : For Review of Disciplinary Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : __________________________________________________: ORDER MODIFYING DISCIPLINARY ACTION TAKEN BY REGISTERED SECURITIES ASSOCIATION On the basis of the Commission's opinion issued this day, it is ORDERED that the findings of violation made by the National Association of Securities Dealers, Inc. ("NASD") against Joseph Patrick Hannan, its imposition of a censure, and the Association's assessment of costs, be, and they hereby are, sustained; and it is further ORDERED that the $1,000 fine imposed on Hannan by the Association be, and it hereby is, reduced to $500; and it is further ORDERED that the six-month suspension imposed on Hannan is canceled. By the Commission. Jonathan G. Katz Secretary