SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 41628 / July 20, 1999
Admin. Proc. File No. 3-9545
In the Matter of the Application of
Stephen J. Gluckman
P.O. Box 84365
Los Angeles, California 90073
For Review of Disciplinary Proceedings by the
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
OPINION OF THE COMMISSION
REGISTERED SECURITIES ASSOCIATION -- REVIEW OF DISCIPLINARY PROCEEDINGS
Violations of Conduct Rules
Person associated with former member firm engaged in private securities transactions without prior written notification to member. Held, association's findings of violation and sanctions it imposed are sustained.
- Conduct Inconsistent with Just and Equitable Principles of Trade
- Failure to Inform Employer of Private Securities Transactions
Stephen J. Gluckman, pro se.
Alden S. Adkins, Norman Sue, Jr., Susan L. Beesley, and Shannon V. Lane, for NASD Regulation, Inc.
Appeal filed: February 24, 1998
Last brief received: June 10, 1998
Stephen J. Gluckman, formerly a registered representative with United International Securities, Inc. ("UIS"), a member of the National Association of Securities Dealers, Inc. ("NASD") at the time of the events at issue, appeals from NASD disciplinaryaction. The NASD found that Gluckman engaged in two private securities transactions in violation of NASD Conduct Rules 3040 and 2110. 1It censured Gluckman, fined him $55,000, barred him from associating with any member in any capacity, and assessed costs against him. We base our findings on an independent review of the record.
Between January 1991 and September 1994, Gluckman was registered as a general securities representative with UIS. 2 At issue is Gluckman's involvement with transactions by Kathleen Phillips and Roger and Peggy Bailey (the "Baileys"), customers of Gluckman's at UIS.
Phillips testified that she had considered Gluckman to be her financial advisor "for a few years." She had relied on Gluckman for a number of investment recommendations. Prior to the investment at issue in this case, his recommendations were clearly offered through UIS. At Gluckman's suggestion, Phillips invested in a company specializing in the sale and lease-back of bus stops in the Los Angeles area, and in a limited partnership formed for the purpose of purchasing low income rental housing. According to Phillips, Gluckman then suggested two investments in the entertainment field. Gluckman first recommended that Phillips invest in an offering in a limited partnership underwritten by UIS. The limited partnership was formed to produce an animated movie called "Blue Bears." 3
In early 1992, Gluckman recommended that Phillips invest in the production of a documentary movie entitled "A Time Machine: The Journey Back" ("Time Machine").4 Gluckman represented that Time Machine was another project by the producers of BlueBears, Clyde Lucas and Birgitta Johansson. Gluckman told Phillips that Lucas was looking for "investor money" for the Time Machine project. The NASD credited Phillips' testimony that Gluckman encouraged her to use some of the funds from her then-ongoing home refinancing to invest in the Time Machine project.
Phillips testified that she met Gluckman and Lucas at a coffee shop on May 5, 1992. During the meeting, Gluckman produced a draft agreement related to the Time Machine project which Phillips and Lucas (on behalf of Soledad Productions ("Soledad")) executed. Under the agreement, Soledad had responsibility for creating and distributing the documentary. Phillips agreed to "advance" Soledad $50,000 and "participate in the gross revenues derived from [Soledad's] efforts." Soledad agreed to pay Phillips $75,000 by no later than November 26, 1992. "If for any reason whatsoever" Soledad failed to meet this deadline, Soledad agreed to transfer five percent ownership in the documentary and its revenues to Phillips. In the event of such non-payment, Soledad would also owe Phillips $75,000 plus ten percent interest on the unpaid balance until Phillips was paid in full "as originally intended."
Peggy Bailey testified that Gluckman recommended to her the bus stop, low income housing, and Blue Bears investments. The Baileys invested in the bus stop and low income housing projects.5 Ms. Bailey further testified that Gluckman telephoned her in August 1992 and recommended that the Baileys invest in Time Machine, which Gluckman characterized as a "good deal." On August 11, 1992, Gluckman brought an agreement to the Baileys' house. Subsequently, the Baileys and Lucas and Johansson (on behalf of Soledad Productions/7th Voyage Productions ("Soledad")) executed this agreement. Under the agreement, Soledad had responsibility for creating and distributing the documentary. The Baileys agreed to "advance" Soledad $50,000 and "participate in the gross revenues derived from [Soledad's] efforts." Soledad agreed to pay the Baileys $75,000 by no later than November 30, 1992. In the event Soledad failed to meet this deadline, Soledad agreed to transfer two percent ownership in the documentary and its revenues to the Baileys, and also to owe the Baileys $75,000 plus ten percent interest on the unpaid balance until the Baileys were paid in full "as originally intended."
Soledad did not fulfill its obligations under the contracts. Instead of the $75,000 promised under each agreement, the record indicates that the investors in each agreement received $825. In 1993, Phillips contacted both UIS and the NASD in an attempt to recoup her losses. The NASD conducted an investigation and, on November 14, 1996, filed a one-count complaint against Gluckmanalleging that Gluckman's activities violated both Conduct Rules 3040 and 2110. On January 23, 1998, the NASD found that Gluckman had violated Conduct Rules 3040 and 2110. This appeal followed.
Conduct Rule 3040 prohibits any person associated with a member firm from participating in any manner in a private securities transaction outside the regular course of employment unless that person provides prior written notice to the member "describing in detail the proposed [private securities] transaction and the person's proposed role therein and stating whether he has received or may receive selling compensation in connection with the transaction."
A. Gluckman argued before the NASD's District Business Conduct Committee ("District Committee") that he could not be charged with a violation of Conduct Rule 3040 because the Time Machine agreements were not securities. On appeal, however, he concedes that these instruments were "investment contracts," and, therefore, securities under SEC v. W.J. Howey Co.6
We agree that the Time Machine agreements were securities under Howey. The Time Machine transactions represented the investment in a common venture with a reasonable expectation of profits to be derived from the entrepreneurial efforts of others.7 Although the Time Machine agreements purported to extend to the investors "an invitation to participate in the business of bringing" the documentary to television, the agreements granted Soledad sole authority to create and distribute the film. The investors' involvement was limited to "participat[ing] in the gross revenues derived from [Soledad's] efforts." In addition, the investors were also promised a certain percentage share in any revenue stream generated by the Time Machine movie in the event Soledad defaulted on its promise to pay both Phillips and the Baileys $75,000 by certain dates.
Gluckman asserts that the success of the Time Machine venture did not depend on his efforts. However, our determination that the Time Machine agreements were securities does not hinge on whether Gluckman's efforts were integral to the success of the Time Machine project. Our determination is basedon the investors' dependence on the efforts of the operator of the venture -- Soledad and, ultimately, Lucas.
We also believe that the Time Machine agreements were securities under the Supreme Court's interpretation of "notes" in Reves v. Ernst & Young.8 The "family resemblance" test adopted by the Supreme Court in Reves presumes that a note is a security as defined in Section 3(a)(10) of the Securities Exchange Act of 1934 9 unless (1) it bears a strong resemblance to certain types of notes recognized, based on four factors, as being outside the investment market regulated under the securities laws, 10 or (2) it should be added, based on a balancing of the same four factors, to that list of excluded notes. 11 As noted by the D.C. Circuit, "the presumption is only rebutted when the two-step, four-factor analysis based on all the evidence leads to the conclusion that the note is not a security." 12 This reflects Congress' intent to define the term "security" with sufficient breadth to encompass virtually any instrument that might be sold as an investment. 13
The Time Machine agreements do not resemble any of the short-term, high quality instruments sold to persons in thebusiness of making loans that are excluded from the definition of a security. 14 The fifty percent rates of return promised for the short duration of the agreements far exceeded what would be expected in the lending market. 15 The Time Machine transactions involved relatively unsophisticated customers, none of whom was in the business of making loans. Rather, the customers believed that they were making investments "to participate in the gross revenues derived from [Soledad's] efforts." 16 This language in the Time Machine agreements shows that "[f]rom both sides, then, the transaction is most naturally conceived as an investment in a business enterprise rather than as a purely commercial or consumer
transaction." 17 Further evidence of investment intent stems from the investors' reliance on Gluckman, their "financial advisor," for recommendations and suggestions on instruments to add to their investment portfolios. 18
The remaining three Reves factors indicate on balance that the Time Machine agreements are securities. Although it is unclear from the record whether Lucas' plan of distribution extended beyond Phillips and the Baileys, this factor alone is not dispositive of the overall question. 19 We believe thatthe investing public would expect that the agreements were investments -- and, therefore, securities -- when approached by Gluckman and Lucas in the manner set forth above. In addition, the investments by Phillips and the Baileys were not insured, and no other factor was present that reduced significantly the transactions' investment risk. 20 Based on our consideration of the same four factors, we conclude that investment vehicles such as the Time Machine agreements should not be added to the list of instruments excluded from securities laws. 21
B. Conduct Rule 3040 prohibits an associated person from participating "in any manner" in a private securities transaction without prior written notification to the employer. When the associated person receives selling compensation, he or she must give written notice to the firm and receive written approval before each transaction. 22* Gluckman downplays the importance of his participation in the transactions. 23 In Gluckman's view, he did not act as a consultant or adviser to any of the parties, nor was he involved in the negotiation of the terms of the agreements. He claims that his role was limited to introducing Phillips and the Baileys to Lucas. Gluckman notes that Phillips and the Baileys held a number of discussions about the Time Machine project with Lucas out of Gluckman's presence, and argues that it was this direct contact with Lucas that caused Phillips and the Baileys to invest in the documentary.
We conclude that Gluckman participated in these transactions. Gluckman admits that he informed Phillips and the Baileys, who were his customers at UIS, that Lucas was seekinginvestors in a new project, and sought permission to exchange their phone numbers with Lucas. Gluckman received a referral fee from Lucas on both Time Machine agreements.
Gluckman further acknowledges that he also typed both agreements, although he claims that he did not prepare the language of the agreements. His claim of a limited, clerical role in preparing that agreement, however, is at odds with Gluckman's admission that he suggested the insertion of certain language into the agreements. In a letter to Phillips dated March 25, 1993, Gluckman wrote:
As to the investment with Clyde Lucas, I made sure your contract included interest for you
. . . and I made sure your contract included a penalty to them . . . for your benefit, not mine
(emphasis in original).
Gluckman wrote in a June 13, 1993 letter to Nicholas Fleming, UIS' president and half owner, that he, Gluckman, had "drawn up" Phillips' Time Machine agreement and had "put in a protection clause for her." Gluckman also acknowledges that he was present at the final meeting between Phillips and Lucas, and that he delivered the agreement to the Baileys' residence. There also is no dispute that Gluckman's involvement in the Time Machine transactions was outside the regular course of his employment with UIS.
Even if we accept Gluckman's claim that he was not aware of all the details of the transactions until after the investors had agreed in principle to invest, the undisputed evidence of Gluckman's involvement is sufficient to conclude that he participated in private securities transactions. Gluckman's responsibility to give notice under Rule 3040 does not hinge on whether the investors also independently discussed and negotiated the transactions with Lucas. The reach of Conduct Rule 3040 is very broad, encompassing the activities of "an associated person who not only makes a sale but who participates `in any manner' in the transaction." 24 We previously have held that an associated person who introduces clients to an investment and later receives a finder's or referral fee participated in the transaction for Rule 3040 purposes.25
The record, moreover, demonstrates that Gluckman's involvement went well beyond introducing investors and collecting finder's fees. The NASD credited Phillips' testimony that Gluckman recommended the Time Machine project to her and suggested that she use funds from the refinancing of her home for this investment. The NASD also credited Peggy Bailey's testimony that Gluckman opined that the "Time Machine investment would be a good deal" because "within three months it would be completed and on the air." We find no basis for disagreeing with the NASD's credibility findings. 26
C. Gluckman concedes that he did not give written notice to UIS prior to participating in either Time Machine transaction. Instead, Gluckman argues that he constructively met the rule's requirements.
1. He asserts that a letter dated January 15, 1992, signed by Fleming, authorized Gluckman to engage in certain transactions outside the scope of Gluckman's employment. However, the letter -- which limited these outside transactions to real estate, life insurance, and living trust matters -- required that all securities transactions be handled through UIS.
2. Gluckman also claims that he gave Fleming oral notice of his involvement in the Time Machine transactions and that Fleming approved his involvement. Fleming testified, however, that he did not learn about the Time Machine investments until he received a complaint letter from Phillips, dated March 27, 1993. The NASD determined not to credit Gluckman's testimony that he provided oral notification to Fleming. 27 Moreover, Gluckmandoes not claim that Fleming's purported approval was in writing, as required by Conduct Rule 3040(c), and acknowledges that it was conditioned on the Time Machine transactions not involving securities. 28
3. Gluckman also cannot escape liability under Conduct Rule 3040(c) by relying on advice from the NASD on whether he could accept a referral fee. 29 Gluckman admits that, although the NASD staff indicated that Gluckman could accept a referral fee, the staff's affirmative response was conditioned on the Time Machine transactions not involving securities.
D. The NASD determined that Gluckman's violations of Conduct Rule 3040 also violated Conduct Rule 2110. Gluckman argues that he was denied his "right to confront [his] accuser" because counsel for the NASD did not sufficiently explain how private securities transactions could violate Conduct Rule 2110. Gluckman had adequate notice of the conduct alleged to be violative. We previously stated that Rule 2110 "is sufficiently specific and provides an adequate standard of compliance." 30
The NASD's determination that Gluckman violated Conduct Rule 2110 is in accord with our long-standing and judicially-recognized policy that a violation of another Commission or NASD rule or regulation, including Conduct Rule 3040, constitutes a violation of Conduct Rule 2110. 31 A finding of intent or scienter is not required when the violation of Conduct Rule 2110 stems from the violation of another rule or regulation.32 We conclude that Gluckman violated Conduct Rule 2110.
Gluckman raises a myriad of procedural objections to this proceeding.
A.1. Gluckman argues that this proceeding must be dismissed because the NASD took over four years to file its complaint against him. The Commission has repeatedly stated, however, that the disciplinary authority of private self-regulatory organizations ("SROs") such as the NASD is not subject to any statute of limitation. 33
2. Gluckman cites to a number of statutory and regulatory limitations periods in support of this argument.
- 28 U.S.C. § 2462. This statute provides a five-year statute of limitations period applicable to government actions and applied to certain Commission proceedings by the United States Court of Appeals for the District of Columbia Circuit in Johnson v. SEC. 34 As recognized in decisions subsequent to Johnson, Section 2462 does not apply to SROs. 35 In any event, the proceedings here were commenced within five years.
- Section 13 of the Securities Act of 1933. 36 The one- and three-year limitations periods in Section 13 apply only to civil actions brought pursuant to Sections 11 37 and
12 38 of the Securities Act.
- Lampf, Pleva, Lipkind, Prupis & Petigrow v.
Gilbertson. 39 The NASD's disciplinary authority is not limited by Lampf, which establishes a statute of limitations for private rights of action under the Exchange Act Section
- California Corporations Code § 25506. This provision establishes a four-year statute of limitations for actions brought pursuant to certain California securities statutes. SRO proceedings are governed by the SRO's own rules and not by state law. 41 Moreover, none of the California statutes to which Section 25506 applies are at issue in this proceeding.
- NASD Code of Arbitration Procedure Rule 10304. This provision establishes a six-year statute of limitations for NASD arbitration proceedings between private parties. The Code of Arbitration does not apply to NASD disciplinary
proceedings. 42 In any event, the NASD brought this action well within six years.
3. We do not accept Gluckman's invitation to create a limitations period for NASD disciplinary proceedings that is not mandated by federal securities laws *43 or the NASD's rules. To do so "would impair the NASD's statutory obligation and duty to protect the public and discipline its members."44
B. Gluckman also claims that he was prejudiced because the NASD "failed to act with reasonable diligence" in filing this action. We understand this to be an invocation of the laches defense. A successful laches defense requires a lack of diligence by the party against whom the defense is asserted, and prejudice to the party asserting the defense. 45
The record indicates that, after Phillips advised the NASD of the Time Machine transaction, the NASD conducted a diligentinvestigation and filed a complaint in 1996. 46 Moreover, Gluckman has not shown any prejudice caused by the NASD's alleged delay in commencing this proceeding.47 Gluckman claims that the NASD's delay was prejudicial because he could not find Lucas in time for him to testify at the NASD hearing. It is unclear from the record when Gluckman lost contact with Lucas, and Gluckman has not presented any evidence that the NASD's delay resulted in his inability to locate Lucas. 48 Given the undisputed evidence that Gluckman violated NASD rules, we do not believe Lucas' testimony would have had a material effect on this proceeding. 49
C. Gluckman makes a number of allegations that the NASD was "mean spirited" towards him and acted with an intent to "convict" him to "collect fine money." 50 We find no merit toGluckman's claim that there was an improper overlap between the NASD enforcement and adjudicatory roles that resulted in the NASD's enforcement staff having undue influence over the association's decision. 51 "While the NASD as a whole, like the Commission, exercises investigatory, prosecutory and quasi-judicial functions, the combination of such functions in one agency does not violate due process of law." 52
D. Gluckman also complains that his constitutional rights were violated because the panels of the District Committee and the National Business Conduct Committee ("National Committee") that heard this matter were composed of stockbrokers and industry representatives who did not have sufficient legal training to consider his case. In the context of regulatory hearing and review, however, the "Due Process Clause has never been thought to require that the neutral and detached trier of fact be lawtrained or a judicial or administrative officer." 53 We have approved of such panels where, as in this case, the District Committee and the National Committee were staffed with NASD members "in accordance with the NASD's Code of Procedure, and there is no showing in the record that the panels were not competent to deal with the issues here." *54
Gluckman also contends that the presence of non-lawyers on the panels violated California's laws prohibiting the unauthorized practice of law. Even assuming arguendo that California law governs the composition of NASD panels, the California Supreme Court has adopted the Morrissey due process standard permitting hearing bodies to include nonlawyers. 55
E. Gluckman complains that his defense was prejudiced because the NASD did not present him with its complete files related to the complaint until immediately before the District Committee hearing. Gluckman, who refused to accept the files at the time of the hearing, argues that he was entitled in advance to this material, including information that the NASD staff did not intend to introduce before the District Committee. While Code of Procedure Rule 9224(a) required the staff to make available any evidence to be presented in the hearing, respondents had no generalized discovery right. 56 In any event, Gluckman received the requested material on July 22, 1997 -- three months before the National Committee heard his appeal. Gluckman has not shown that the files contained any exculpatory evidence or explained at his hearing before the National Committee or in any of his subsequent filings with the Commission how, in light of the undisputed facts of this case, his defense would have been helped by earlier receipt of the NASD's
files. 57 In the absence of such a showing, we conclude that Gluckman was not prejudiced by any delay in receiving the files.
Gluckman argues that the sanctions assessed are out of proportion to sanctions imposed in other cases.58 Under Section 19(e)(2) of the Exchange Act, 59 we affirm the NASD's sanctions determination unless we find it "excessive or oppressive."
We disagree with Gluckman's argument that the sanctions are excessive. The NASD properly considered several factors that it believed weighed in favor of substantial sanctions, including a bar. First, Gluckman previously had been disciplined for violating the NASD's rules regarding private securities transactions. His repetition of this conduct suggests that Gluckman's continued association with an NASD member firm poses a risk of future violations. 60
Second, characterization of Rule 3040 as a mere "technicality," suggests that Gluckman either does not understandor is indifferent to the risks posed by his misconduct. Neither is excusable, particularly since, as the NASD noted, Gluckman should have had a "heightened awareness" of Rule 3040 in light of his prior violation. And Gluckman plainly was aware of what the rule required; indeed, there is no dispute that Gluckman took precisely the steps the rule requires in obtaining and documenting his supervisor's consent for his real estate sales activities. Even Gluckman's testimony, which the NASD did not credit, that he sought oral approval for the sales at issue here underscores his awareness of the rule.
Third, the NASD noted that Gluckman's "lack of remorse" suggested that, absent a bar, Gluckman's customers could be subject to "extreme risk." We agree with the NASD that Gluckman's failure to provide assurance that his misconduct will not recur provides further support for its choice of sanction.
Fourth, the rule Gluckman violated is an important one. By prohibiting "selling away" from the member with whom a registered representative is associated, Rule 3040 protects investors from the hazards of unmonitored sales, while protecting the member firm from exposure to loss and litigation. 61
Gluckman solicited unsophisticated investors for highly speculative investments, precisely the type of security offerings that required heightened scrutiny by a broker-dealer. When, as here, clients are solicited by an associated person for some investments offered through the member firm and some offered privately, the client may erroneously believe that the member firm has researched and recommended all of the investments. And in fact, one of Gluckman's clients testified that she believed the offering was conducted under the UIS' "auspices." 62 As the NASD noted, this case resulted in "the very consequences that Rule 3040 was designed to prevent" because Gluckman acted independently of his member firm.
Finally, the sanctions imposed by the NASD are within the range provided for in the NASD's Sanction Guidelines for "SellingAway (Private Securities Transactions)." 63 As the Guidelines note, "[i]n more serious cases . . . , a bar should be standard." Based on the foregoing, we do not find that the sanctions imposed by the NASD against Gluckman are either excessive or oppressive.
An appropriate order will issue. 64
By the Commission (Chairman LEVITT and Commissioners JOHNSON, HUNT, CAREY, and UNGER)
Jonathan G. Katz
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 41628 / July 20, 1999
Admin. Proc. File No. 3-9545
In the Matter of the Application of
Stephen J. Gluckman
P.O. Box 84365
Los Angeles, California 90073
For Review of Disciplinary Proceedings by the
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
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. against Stephen J. Gluckman, and the association's assessment of costs, be, and they hereby are, sustained.
By the Commission.
Jonathan G. Katz
-- Conduct Rule 3040 prohibits any person associated with a member firm from participating in any manner in a private securities transaction outside the regular course or scope of his employment without providing prior written notice to the member. Conduct Rule 2110 requires that members and associated persons "observe high standards of commercial honor and just and equitable principles of trade."
-- Gluckman entered the securities business in 1983. The record indicates that Gluckman has not been registered with a member firm since May 1995.
-- Phillips invested between $5,000 and $7,500 in Blue Bears. According to Phillips, she lost this entire investment.
-- The subject of the documentary was a 1950s science fiction movie.
-- Ms. Bailey stated that the bus stop project was the Baileys' first investment.
-- 328 U.S. 293 (1946).
-- Compare Prime Investors, Inc., Securities Exchange Act Rel. No. 38487 (April 8, 1997), 64 SEC Docket 742, 752 & n.24 (applying test for investment contract) (citing United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 852 (1975) and W.J. Howey, 328 U.S. at 298-99).
-- 494 U.S. 56 (1990).
-- 15 U.S.C. § 78c(a)(10).
-- The four factors are: (1) the motivations that would prompt a reasonable borrower and lender to enter into the transaction; (2) the plan of distributing the notes; (3) the reasonable expectations of the investing public regarding whether the instruments were securities; and (4) the presence of any alternative scheme of regulation or other factor that significantly reduces the risk of the instrument so as to make regulation under the securities laws unnecessary. Reves, 494 U.S. at 66-67.
-- See, e.g., Stoiber v. SEC, 161 F.3d 745, 752 (D.C. Cir. 1998) (two of four Reves factors "strongly favor" treating notes as securities); National Bank of Yugoslavia v. Drexel Burnham Lambert, Inc., 768 F. Supp. 1010, 1016 (S.D.N.Y. 1991) (determining that note was security because "three of four Reves factors weigh in favor of finding that the [investments] were `securities'"). Compare Charles E. French, Securities Exchange Act Rel. No. 37409 (July 8, 1996), 62 SEC Docket 828, 832-33 (reviewing Reves factors).
--* Stoiber, 161 F.3d at 749 n.7.
-- Trust Co. of Louisiana v. N.N.P. Inc., 104 F.3d 1478, 1489 (5th Cir. 1997).
-- Reves, 494 US at 65-66 (non-exclusive list of such instruments); Phyllis J. Elliott, 51 S.E.C. 991, 993 n.10 (1994).
The presumption in favor of a security is not overcome merely because the duration of the notes here was less than nine months. Id. (citing SEC v. R.G. Reynolds Enterprises, Inc., 952 F.2d 1125, 1133 (9th Cir. 1991)).
-- Compare Stoiber, 161 F.3d at 750 ("favorable interest rate indicates that profit was the primary goal of the lender").
-- See, e.g., Elliott, 51 S.E.C. at 993 (purchaser motivated by investment intent); Darrell Jay Williams, 50 S.E.C. 1070, 1072 n.4 (1992) (promissory note sold as an investment to customer of broker-dealer was security).
-- Reves, 494 U.S. at 68.
-- Compare Pollack v. Laidlaw Holdings, Inc., 27 F.3d 808, 813 (2d Cir. 1994) (in reviewing Reves factors, court found that buyers intended to invest because the notes were obtained "by their investment adviser as part of their investment portfolios"), cert denied, 513 U.S. 963 (1994).
-- Trust Co. of Louisiana, 104 F.3d at 1489 (citing Reves, 494 U.S. at 61) ("debt instrument may be distributed to but one investor, yet still be a security").
-- Stoiber, 161 F.3d at 751-52 (noting absence of "risk reducing factors"); French, 62 SEC Docket at 832-33 (applying four factors from Reves to note).
-- William Louis Morgan, 51 S.E.C. 622, 626-27 (1993) ("[T]he Supreme Court intended to exclude . . . only certain types of notes which are issued in a purely commercial or consumer context.").
-- Ronald J. Gogul, Securities Exchange Act Rel. No. 35824 (June 8, 1995), 59 SEC Docket 1444, 1449 n.14.
--Gluckman also claims that he did not "participate in the preparation of" the Time Machine transactions as participation is defined in California Corporations Code
§ 25504.2(c). Section 25504.2, however, addresses civil liability of certain professionals, such as accountants, engineers, and appraisers, under California law for information attributed to them in prospectuses or offering circulars. This section is inapplicable to a proceeding to enforce the NASD rules.
-- Gogul, 59 SEC Docket at 1448.
-- See, e.g., Gilbert M. Hair, 51 S.E.C. 374, 378 (1993) (representative's activities as "finder" who received "referral fee" was sufficient to subject him to the NASD's rules regarding private securities transactions); Charles A. Roth, 50 S.E.C. 1147, 1150 (1992) (same).
Rule 3040(e)(2)'s definition of "selling compensation," which includes commissions and finder's fees, encompasses Gluckman's referral fee. Thus, Conduct Rule 3040(b) required Gluckman to give UIS advance written notice of each transaction.
-- See, e.g., Robert E. Gibbs, 51 S.E.C. 482, 483 (1993) ("credibility determination of the initial decision maker is entitled to considerable weight and deference, since it is based on hearing the witnesses' testimony").
-- In reaching this conclusion, the NASD noted that Gluckman's answer did not mention this purported oral notification. Rather, Gluckman unequivocally stated, "I did not refer [the transactions] to my principal as [these were] not securit[ies]." The NASD further discounted Gluckman's testimony, noting that, since Gluckman previously hadobtained Fleming's written permission to engage in the transactions described in Section III.C.1 above, it was unlikely that Gluckman would later give only oral notification of the Time Machine transactions.
-- See, e.g., Dale M. Russell, 51 S.E.C. 561, 563-64 & n.9 (1993) (oral notification of intent to engage in private securities transactions is insufficient).
-- See Thomas C. Kocherhans, Securities Exchange Act Rel. No. 36556 (December 6, 1995), 60 SEC Docket 2589, 2594 (respondent cannot shift responsibility for compliance to supervisors or the NASD). See also Hair, 51 S.E.C. at 378 n.12 (respondent's ignorance of the NASD's rules regarding private securities transactions did not relieve him from liability for any violations). Compare Carter v. SEC, 726 F.2d 472, 473-74 (9th Cir. 1983) (it is irrelevant whether representative knew of the notification requirements with respect to private securities transactions).
Gluckman also cannot shift responsibility for compliance with Conduct Rule 3040 to Fleming. Kocherhans, 60 SEC Docket at 2594. Nor would he be entitled to rely on representations by the issuer that the Soledad interests were not securities. Hair, 51 S.E.C. at 377.
-- Benjamin Werner, 44 S.E.C. 622, 625 & n.11 (1971) (considering predecessor to Conduct Rule 2110), aff'd (D.C.Cir. 1972) (unpublished opinion). Compare Vail v. SEC, 101 F.3d 37, 39 (5th Cir. 1996) (predecessor to Conduct Rule 2110 was not unconstitutionally vague).
Similarly without merit is Gluckman's argument that his involvement with the Time Machine transactions could not have violated Conduct Rule 2110 because private securities transactions are not mentioned in IM-2110-1, the NASD's "Free-Riding and Withholding Interpretation." While the interpretation addresses in detail certain conduct proscribed by Rule 2110, it is not an exclusive list of conduct that violates Rule 2110.
-- Sirianni v. SEC, 677 F.2d 1284, 1288 (9th Cir. 1982) (failure to provide notice of private securities transaction violates representatives's duty to "observe high standards of commercial honor and just and equitable principles of trade"); Gogul, 59 SEC Docket at 1450 (violation of NASD rule regarding private securities transactions also constitutes violation of just and equitable principles of trade); Gerald James Stoiber, Securities Exchange Act Rel. No. 39112 (September 22, 1997), 65 SEC Docket 1309, 1318 & n.22 (same), aff'd on other grounds, 161 F.3d 745 (D.C. Cir. 1998).
-- See, e.g., Erdos v. SEC, 742 F.2d 507, 508 (9th Cir. 1984) (violation of just and equitable principles of trade, when based on breach of another NASD rule, does not require that the person act with scienter); Clinton Hugh Holland Jr., Securities Exchange Act Rel. No. 36621 (December 21, 1995), 60 SEC Docket 2935, 2941 n.20 (recognizing that violations of other NASD rules constitute a violation of just and equitable principles of trade, and finding such a violation even where the applicant acted in good faith), aff'd, 105 F.3d 665 (9th Cir. 1997) (Table).
-- See, e.g., Henry James Faragalli, Jr., Securities Exchange Act Rel. No. 37991 (November 26, 1996), 63 SEC Docket 826, 841-42 ("[I]t is well established that no statute of limitations applies to the disciplinary actions of the Exchange or other self-regulatory organizations. . . ."); Frederick C. Heller, 51 S.E.C. 275, 280 (1993) (same). Gluckman's citation to Prevatte v. NASD, 682 F. Supp. 913 (W.D. Mich. 1988), is inapposite; the Prevatte case did not involve NASD disciplinary action, and the court's statute of limitations discussion applied to a party unrelated to the NASD.
-- 87 F.3d 484 (D.C. Cir. 1996).
-- Lang v. French, 974 F. Supp. 567, 569 (E.D. La. 1997) ("[N]o statute of limitations [is] applicable to disciplinary actions brought by self-regulatory organizations like NASD."), aff'd on other grounds, 154 F.3d 217 (5th Cir. 1998); Faragalli, 63 SEC Docket at 842 n.36 (Johnson inapplicable to SRO proceedings); Larry Ira Klein, Securities Exchange Act Rel. No. 37835 (October 17, 1996), 63 SEC Docket 70, 82 & n.35 (SRO proceedings are not initiated by a government entity such as the Commission, nor does the government control when the SRO begins or concludes its determination).
--15 U.S.C. § 77m.
-- 15 U.S.C. § 77k. Section 11 provides for civil liability based on false information contained in registration statements filed with the Commission.
-- 15 U.S.C. § 77l. Section 12 creates civil liability in connection with prospectuses and certain communications.
-- 501 U.S. 350 (1991).
-- 15 U.S.C. § 78j(b). See e.g. Faragalli, 63 SEC Docket at 841; Steven B. Theys, 51 S.E.C. 473, 480 (1993).
-- Faragalli, 63 SEC Docket at 841-42 n.35. The United States Court of Appeals for the Ninth Circuit recently reached a similar conclusion in determining that the NASD's regulatory immunity shields it from state common law rights of action. See Sparta Surgical v. N.A.S.D., 159 F.3d 1209, 1215 (1998) ("[A]llow[ing] states to define by common law the regulatory duties of a self-regulatory organization . . . cannot co-exist with the Congressional scheme of delegated regulatory authority under the Exchange Act.").
-- See James M. Bowen, 51 S.E.C. 1152, 1153 (1994) (NASD "arbitration procedure is designed to provide speedy resolution of disputes among members, their employees, and the public."). Gluckman appears mistakenly to believe that this proceeding is an arbitration proceeding. The NASD's Code of Arbitration Procedure, however, is inapplicable to NASD enforcement actions. See Code of Arbitration Procedure 10101 (defining scope of arbitration). Rather, enforcement actions are governed by the NASD Code of Procedure, which includes no limitations period.
-- Gluckman also argues the converse: that the NASD is subject to the statute of limitations because the Maloney Act [codified at 15 U.S.C. § 78o-3, et seq.], under which the NASD was established, did not expressly exempt the NASD from the general application of limitations periods to government entities. However, it is not necessary for enabling legislation expressly to exempt SROs from constitutional and statutory provisions that on their face are applicable only to government agencies. Compare Shultz v. SEC, 614 F.2d 561, 569 (7th Cir. 1980) (Chicago Board Options Exchange not "authority of the government" and thus not governed by Administrative Procedure Act); United States v. Solomon, 509 F.2d 863, 868-71 (2d Cir. 1975) (self-incrimination privilege does not apply to questioning in New York Stock Exchange proceeding).
-- Heller, 51 S.E.C. at 280.
-- Robert E. Kauffman, 51 S.E.C. 838, 840 (1993) (citing Hecht v. Harris, Upham & Co., 430 F.2d 1202, 1208 (9th Cir. 1970)).
-- Compare Kauffman, 51 S.E.C. at 840 n.7 (laches defense inapplicable because NASD had no reason to investigate representative's statements until NASD received complaints).
-- See, e.g., Thomas E. Warren, III, 51 S.E.C. 1015, 1020 n.20 (1994) (applicant did not show prejudice from delay); Richard C. Spangler, Inc., 43 S.E.C. 1093, 1094 (1969) (same).
-- Compare FDIC v. Fuller, 994 F.2d 223, 225 (5th Cir. 1993) (party asserting laches defense failed to show that he knew whereabouts of missing witness prior to the alleged period of delay by other party and subsequently lost track of witness).
--Gluckman also claims that he was denied the opportunity to bring a separate action against Lucas because the statute of limitations on such a lawsuit has expired. At issue here, however, is the fundamental fairness of this proceeding.
-- Gluckman also claims that he was prejudiced in his attempt to find employment as a registered representative because the NASD refused to provide to prospective employers his complete NASD disciplinary file. The alleged prejudice to Gluckman from any denial of particular employment is beyond the scope of this appeal. Gluckman's allegation may also be an attempt to show that he was the victim of a pattern of inappropriate conduct by the NASD. If so, Gluckman has not adequately explained -- beyond conclusory allegations that the NASD was negative and failed to give the "whole story"
-- what information was released and how the NASD's actions in his case failed to comply with the NASD's practices concerning release of such information. See NASD Complaints, Investigations and Sanctions IM-8310-2 (NASDshall release "certain information contained in its files regarding the employment and disciplinary history of members and their associated persons").
--Contrary to Gluckman's assertion, there is no evidence that the NASD miscited caselaw and took "literary license" in an improper attempt to discipline Gluckman.
We also reject Gluckman's claim that he was prejudiced by the NASD's delay in serving him with pleadings in this matter. The first delay concerns Gluckman's receipt of the NASD's opposition brief before the National Business Conduct Committee. Gluckman acknowledges that the NASD staff in a telephone message offered to give him extra time to formulate his reply brief. As the record indicates that Gluckman did not pursue this offer of extra time, we conclude that no prejudice resulted from the NASD's delay. The two other delays concern the NASD's opposition brief filed with the Commission. As he received the opposition brief late, Gluckman requested and received additional time to reply. Therefore, he was not prejudiced by this delay. Gluckman also complains that for nearly four months he did not receive the NASD's letter to the Commission agreeing to Gluckman's request for additional time. As Gluckman received and used the additional time, no prejudice resulted.
-- Daniel C. Adams, 47 S.E.C. 919, 922 & n.12 (1983) (citing Intercontinental Industries, Inc. v. American Stock Exchange, 452 F.2d 935, 943 (5th Cir. 1971)).
-- Washington v. Harper, 494 U.S. 210, 231 (1990) (quoting Parham v. J.R., 442 U.S. 584, 607 (1979)); see also Morrissey v. Brewer, 408 U.S. 471, 489 (1972) (minimum due process requirements include a "neutral and detached" hearing body, the members of which need not be judicial officers or lawyers).
-- Thomas R. Alton, Securities Exchange Act Rel. No. 36058 (August 4, 1995), 59 SEC Docket 2978, 2989.
-- See, e.g., People v. Arreola, 7 Cal. 4th 1144, 1151-52 (1994) (Morrissey applies to state probation hearings).
-- See, e.g., Joseph H. O'Brien, II, 51 S.E.C. 1112, 1116 n.15 (1994) (citing Mister Discount Stockbrokers, Inc. v. SEC, 768 F.2d 875 (7th Cir. 1985)). Rule 9224(a) has been repealed since the NASD instituted this proceeding. Discovery in NASD disciplinary actions is now governed by NASD Code of Procedure Rule 9250 et seq.
-- See, e.g., William Jackson Blalock, Securities Exchange Act Rel. No. 35002 (November 23, 1994), 58 SEC Docket 155, 168 n.36 (denial of access to entire file did not prejudice respondent where many of facts in proceeding were conceded).
-- Gluckman's other argument in mitigation is equally unavailing. He argues that his attempt to provide oral notification to Fleming should be considered. The NASD, however, did not credit Gluckman's testimony regarding the purported oral notification. We find no basis for disregarding the NASD's credibility determination.
-- 15 U.S.C. § 78s(e)(2).
--60 On August 2, 1985, Gluckman accepted a Letter of Acceptance, Waiver, and Consent in which he was censured and fined $1,000 for engaging in a private securities transaction. The NASD properly considered Gluckman's prior disciplinary history. See, e.g., Gordon Wesley Sodorff, Jr., 50 S.E.C. 1249, 1250 (1992).
We also believe that Gluckman's claim that he solicited advice from the NASD regarding acceptance of referral fees should be viewed as increasing the egregiousness of Gluckman's conduct. Although Gluckman states that the NASD told him that he could accept a referral fee only if the transaction did not involve securities, the record does not contain any evidence that Gluckman investigated whether the Time Machine transactions involved securities.
--61 See, e.g., Morgan, 51 S.E.C. at 625.
--According to Phillips, she invested in the project because "the fact that [UIS] had raised $650,000 for Blue Bears . . . was [a] hearty endorsement of Mr. Clyde Lucas." When asked if she thought UIS was involved with the Time Machine project, Phillips testified that "Mr. Gluckman had informed me about Blue Bears and it was the same producer. And, you know, my only way of contacting him was at [UIS]. So, I guess I mis-assumed that, you know, that they were under the same auspices of [UIS]."
--The fine of $55,000 includes the $5,000 referral fee that Gluckman received for the two transactions, plus $50,000.
-- We have considered all of the parties' contentions. We have rejected or sustained them to the extent that they are inconsistent or in accord with the views expressed herein.