SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 37305 / June 12, 1996 Admin. Proc. File No. 3-8722 ___________________________________________________ : In the Matter of the Application of : : HERBERT J. BURNS : 1940 Foxfire Court : Bloomfield Hills, Michigan : : For Review of Disciplinary Action Taken by the : : NEW YORK STOCK EXCHANGE, INC. : ___________________________________________________: OPINION OF THE COMMISSION NATIONAL SECURITIES EXCHANGE -- REVIEW OF DISCIPLINARY PROCEEDINGS Where former chief executive officer of member organization of national securities exchange engaged in another business without making written request to member and receiving written consent of member, held, exchange's finding of violation and the sanctions it imposed sustained. APPEARANCES: Herbert J. Burns, pro se. Arthur S. Okun, Margaret T. Roussel, and Lawrence B. Carlson, for the New York Stock Exchange, Inc. Appeal filed: June 14, 1995 Briefing completed: September 12, 1995 I. Herbert J. Burns ("H. Burns"), who, at the time of the conduct at issue was associated with Olde Discount Corporation ("Olde Corp." or the "Firm"), a member organization of the New York Stock Exchange, Inc. ("NYSE"), appeals from NYSE disciplinary action. The NYSE found that H. Burns, while employed by Olde Corp., engaged in another business without making a written request to Olde Corp. and obtaining its prior ==========================================START OF PAGE 2====== written consent, in violation of NYSE Rule 346(b). 1/ The NYSE censured H. Burns, and barred him from membership, allied membership, approved person status, and employment or association in any capacity with any member or member organization for a period of two months. Our findings are based on an independent review of the record. II. H. Burns was the chief executive officer and a member of the board of Olde Corp. during the period from January 1985 to October 1990, 2/ when his employment was terminated by the Firm. The other two directors of Olde Corp. during the relevant period were Ernest Olde ("Olde"), its founder and majority stockholder, and Randall Mudge. H. Burns' daughter, Susan Burns ("S. Burns"), was the sole owner of S. L. Burns & Co. ("Burns Co."), a company furnishing accounting and computer consulting services. Around August 1986, Burns Co. purchased a broker-dealer, Allstate Discount Brokers, Inc. (renamed State Discount Brokers, Inc. in December 1986 and hereafter referred to as "State"). 3/ H. Burns asserts that Olde knew in 1986 that Burns Co. was going to purchase State. According to Olde, he did not know about this purchase until the fall of 1988. 4/ In September 1988, H. Burns, who was in charge of Olde Corp.'s acquisition program, sent James Wright, president of Wilmington Brokerage Services Company ("Wilmington"), a letter relating to the proposed purchase by Olde Corp. of Wilmington's Bala Cynwyd, Pennsylvania branch office ("Bala Cynwyd branch"). The letter on Olde Corp. stationary was signed by H. Burns as president of Olde Corp., and stated that "[i]n accordance with 1/ NYSE Rule 346(b) provides in relevant part that, Without making a written request and receiving the prior written consent of his . . . member organization employer, no . . . employee . . . shall at any time be engaged in any other business . . . . 2/ In January 1989, H. Burns became chairman of the board. 3/ Burns Co. purchased State from a former Olde Corp. employee who continued to run State. Burns Co. sold State back to the former Olde Corp. employee in 1990 or 1991. 4/ Mudge testified that he first heard about State in the fall of 1988, when Olde advised him that "[H. Burns] just told me that his daughter bought State Discount." ==========================================START OF PAGE 3====== our discussions," it is "our intent" to purchase the Bala Cynwyd branch assets and customer accounts. Wright, who was in charge of selling the Bala Cynwyd branch, confirmed the fact that he negotiated with H. Burns for the sale of that branch. Indeed, Wright testified that in the course of those negotiations he dealt only with H. Burns. 5/ Wright thought that H. Burns was negotiating for Olde Corp. until "[v]ery late in the game," when H. Burns changed the name of the purchaser to State, a company that Wright believed was affiliated with Olde Corp. State acquired the Bala Cynwyd branch operations by December 1988. After the termination of H. Burns' employment with Olde Corp., Bruce Campbell, an attorney in its legal department, was directed by Mudge to search H. Burns' office for any important documents pertaining to pending legal matters involving Olde Corp. 6/ Campbell identified a number of documents found in H. Burns' office, including drafts of agreements between State and Burns Co., a copy of a cashier's check for $100,000 payable to Wilmington with State listed as remitter, letters and other materials addressed to State, State bank deposit forms, State advertising materials, and State internal memoranda. 7/ H. Burns asserts that he discussed the proposed acquisition of the Bala Cynwyd branch by Olde Corp. with Olde, who rejected the proposal. Olde testified that H. Burns did not discuss any such proposed acquisition with him, and that he knew nothing about H. Burns' negotiations for the Bala Cynwyd branch prior to H. Burns' departure from Olde Corp. in October 1990. 8/ H. Burns claims that the Olde Corp. board approved his activities in meetings between him and Olde (who together 5/ Matthew Lynch, Jr., a staff attorney with Wilmington Trust Company, a bank that owned Wilmington, drafted a preliminary and a final contract for the sale of the Bala Cynwyd branch assets to State. Lynch testified that he dealt only with H. Burns. 6/ Mudge had locked the office on the evening of H. Burns' termination. 7/ These documents were admitted into evidence without objection by H. Burns. Some of the documents were torn-up when found by Campbell. H. Burns stated that, except for the draft of a purchase agreement in his handwriting, he does not recall having ever seen the documents in question. However, we do not consider this explanation persuasive. 8/ Mudge testified that H. Burns never presented the proposed purchase to him, and that Olde never advised him of such a proposal by Burns. ==========================================START OF PAGE 4====== constituted a quorum of the board), and that this approval was reflected in the minutes of those meetings. 9/ H. Burns stated that, at every meeting he had with Olde, he wrote on a yellow pad the date of the meeting, the identity of the participants, and the decisions that were reached. 10/ He further stated that he considered the writings on the yellow pad to be "minutes of the meeting," and that he would file those "minutes" by date in a locked cabinet file. H. Burns was unable to produce the "minutes" of his meetings with Olde that he assertedly recorded and filed in a locked cabinet. 11/ In any event, the informal jottings of an interested person cannot constitute the requisite written permission to engage in outside business activities. Moreover, as noted above, Olde testified that he was unaware of H. Burns' negotiations for the purchase of the Bala Cynwyd branch. Olde further testified that he never gave H. Burns either written or oral authorization to engage in any activity on behalf of State and, in fact, made it clear to H. Burns that he should not engage in any such activity. According to Olde, H. Burns assured him that he would not "be involved at all" with State, and would "devote full time" to the Firm. H. Burns also argues that, as chief executive officer of Olde Corp., he had "full authority to approve" all the activities in question. 12/ However, the extent of H. Burns' authority is not determinative of his compliance with Rule 346(b). That rule prohibits an employee of a NYSE member organization from engaging in any other business without the prior written consent of his employer. We agree with the NYSE that Rule 346(b) "required action by the Firm in a formal, documented manner." 9/ H. Burns asserts that Mudge never attended "any of the important meetings" between H. Burns and Olde. 10/ Olde stated that H. Burns brought a yellow pad "on occasion to several meetings." 11/ H. Burns stated that the "minutes" were removed from his locked files by someone other than himself after his employment was terminated by the Firm. 12/ H. Burns argues that the NYSE hearing officer improperly refused to accept the authenticity of Olde Corp.'s By-Laws which established his authority at the Firm. The By-Laws bore the heading "Financial Management & Research Corporation." Nevertheless, the By-Laws were admitted into evidence. Moreover, the NYSE recognized the "broad discretion" conferred on H. Burns by virtue of his position with Olde Corp. ==========================================START OF PAGE 5====== Such a requirement is particularly important to prevent a senior officer, such as H. Burns, from granting himself permission to engage in outside business activities that may be incompatible with his obligations to his firm and its clients. 13/ The record does not establish the "formal, documented" action by Olde Corp. constituting the "written consent" necessary for compliance with NYSE Rule 346(b). The Olde Corp. corporate secretary, who is the custodian of the minutes of board meetings, reviewed those minutes but could find no request by H. Burns to engage in State's business. The Olde Corp. compliance director, who had to approve any employee's outside business activities or at least receive the approval documents for supervision purposes, reviewed the Firm's compliance files but found no request made by H. Burns for permission to become involved with State. Indeed, H. Burns admitted that, although it was the normal practice at Olde Corp. to present a written request to the compliance officer for permission to engage in an outside business activity, he did not do so here. 14/ In light of the foregoing, we find that, while employed by Olde Corp., H. Burns engaged in another business, and that he did not make a written request to and receive the prior written consent of Olde Corp. to engage in such business. We accordingly conclude that H. Burns thereby violated NYSE Rule 346(b). 15/ III. H. Burns makes a number of allegations with respect to the conduct of this proceeding. 13/ H. Burns claims that all of his activities in connection with Wilmington were for the benefit of Olde Corp. However, the record does not establish this claim. 14/ H. Burns stated that he did not present such a request to the Olde Corp. compliance officer because "[he] did not think [he] was engaging in business." As we find herein, however, he was so engaged. 15/ Rule 346(b), as here relevant, further provides that without making a written request and receiving the prior written consent of his member organization employer, no employee shall have, directly or indirectly, any financial interest in any other organization engaged in a securities business. The NYSE found that H. Burns violated Rule 346(b) in that he had an impermissible financial interest in his daughter's firm. In light of our findings here, we do not reach this issue. ==========================================START OF PAGE 6====== (A) H. Burns complains that, since he had no subpoena power to require Olde Corp. to produce the various documents he requested, he obtained only one of those documents. In an effort to assist H. Burns, the NYSE hearing officer directed Olde Corp. prior to the hearing to produce the documents requested by H. Burns that the hearing officer considered relevant. 16/ It appears that, to the extent that these documents were available, Olde Corp. furnished them. 17/ (B) H. Burns challenges the qualifications of a member of the NYSE panel assigned to hear this case. He states that the panel member's employer retains for its employees the same counsel who represents Olde Corp. In our view, any such connection is too tenuous to warrant the panelist's recusal. H. Burns does not allege any actual bias or conflict of interest on the part of the panel member, and we see no prejudice to H. Burns resulting from the member's participation in the panel. (C) Two out-of-town witnesses, James Wright and Matthew Lynch, Jr., who were at the time of the hearing employed by Wilmington Trust Company ("Trust Co."), a bank that owned Wilmington, agreed to meet with H. Burns in Detroit on the evening of July 25, 1994, and to permit him to examine certain documents in their possession prior to the hearing beginning on July 26. H. Burns asserts that, on the morning of July 25, he was advised by Lynch that the NYSE Division of Enforcement ("Division") told them not to come until the evening of July 26. H. Burns then arranged to meet with Wright and Lynch on the evening of July 26, but when he arrived for the meeting they were not available. H. Burns claims that the Division engaged in a deliberate effort to deprive him of "discovery" and "depositions." We cannot agree. The NYSE had no jurisdiction over Wright and Lynch because their employer, Trust Co., was not an NYSE member organization. Thus, the participation of Wright and Lynch at the hearing was purely voluntary. Stating that it recognized that 16/ The hearing officer denied H. Burns' request for additional information from Olde Corp. "without prejudice to renewal [of the request] upon a showing of relevance at the hearing." 17/ We admit into evidence a letter from Olde Corp.'s counsel to the hearing officer, which was attached to H. Burns' brief to us. In the letter, Olde Corp. counsel states that H. Burns had removed and shredded documents in the files in his office, and that the files that remained relating to Olde Corp.'s business have been assimilated into the Firm's files and cannot be recreated. H. Burns denies that he removed or shredded any documents. ==========================================START OF PAGE 7====== their testimony would not be needed until July 27, the Division acknowledged that it advised Wright and Lynch that they "did not have to arrive" until the evening of July 26. Of course, the two witnesses were free to disregard that advice. The rescheduled meeting on July 26 between them and H. Burns did not take place because, as Wright testified, he and Lynch arrived late due to a delay in their flight. When Wright and Lynch were called as witnesses on the following day, H. Burns did not request a postponement but proceeded to examine them. Under the circumstances, we see no merit in H. Burns' complaint. (D) H. Burns complains about the presence and conduct of Olde Corp.'s outside counsel at the NYSE hearing. H. Burns also asserts that Olde Corp. counsel improperly interfered with three of H. Burns' witnesses. He claims that Olde Corp. counsel prevented him from having a "brief discussion" with these witnesses immediately prior to their testimony at the hearing. It appears that, at the hearing, Olde Corp. counsel represented Olde and the other three witnesses who were employees of Olde Corp. ("Olde Corp. employees"). We see no impropriety in the presence of Olde Corp. counsel at the hearing. Nor can we find that the conduct of Olde Corp. counsel improperly interfered with H. Burns' rights at the hearing. Counsel did not prevent the three Olde Corp. employees from testifying, and they were in fact examined at the hearing by H. Burns. 18/ (E) H. Burns advised the hearing officer at the hearing that he wished to call his daughter S. Burns to testify but she was unable to appear between 9:00 a.m. and 5:00 p.m. because her presence was required at work. H. Burns argues that the hearing officer erred in not setting a special time for S. Burns to testify. The record shows that the hearing officer endeavored to accommodate S. Burns' work schedule. On the second day of the hearing, he suggested the possibility of her testifying by telephone. When H. Burns replied that S. Burns could not do so "during the day," the hearing officer offered to permit her to testify at 5:00 p.m. that evening or at 8:00 a.m. the following morning. However, H. Burns advised the hearing officer that S. Burns was unable to accept these suggestions. On the third day of the hearing, the hearing officer offered to permit S. Burns to testify in person or by telephone. Rejecting this proposal, H. 18/ H. Burns further complains that Olde Corp. did not produce an Olde Corp. vice president whom he wanted to call as a witness. At the hearing, however, Olde Corp. counsel stated that this person was unavailable because he was on vacation (he could not be reached by telephone), and H. Burns agreed to proceed without him. ==========================================START OF PAGE 8====== Burns stated that the case should "go forward without her testimony." When the hearing officer finally suggested that S. Burns might testify several days later at 5:30 p.m., H. Burns again expressed his willingness to proceed without her, observing that the issues that she would testify to "are not relevant." Under the circumstances, we do not find that the hearing officer acted improperly in this matter. 19/ IV. H. Burns urges us to set aside the sanctions that the NYSE assessed against him. H. Burns claims that he cooperated fully with the Division in its investigation relating to him. He states that Olde Corp. terminated his employment five years ago, that he was unemployed for two years following his termination by Olde Corp., and that the NYSE waited almost four years before holding hearings in this case. The factors presented are not sufficient to overcome the misconduct we have found. Although we have not reached one finding of violation by the NYSE, we think that the sanctions it imposed are fully warranted. H. Burns violated an important NYSE rule. NYSE Rule 346(b) prohibits an employee from engaging in any outside business activities without making a written request to and receiving the prior written consent of his member organization employer. It is a prophylactic rule designed to assure that an employee engages in conduct consistent with his duties to his employer and its clients. It also enables the employer to discharge its duty of supervising the activities of its employees in appropriate cases, and assists in protecting the employer from liability in connection with the outside activities of its employees. Under all the circumstances, we find that the sanctions that the NYSE assessed against H. Burns are neither excessive nor oppressive. 19/ H. Burns asserts that he was improperly prevented from attacking Olde's credibility. He complains that he was required to strike from his answer certain comments that he made regarding Olde's character, and that the hearing officer did not permit him fully to cross-examine Olde relating to his character. H. Burns also claims that he was precluded from introducing evidence bearing on Olde's credibility. We are unable to conclude that H. Burns was treated unfairly. He has made no showing, and we cannot find, that the matters he raises are material and undermine Olde's credibility in this case. ==========================================START OF PAGE 9====== An appropriate order will issue. 20/ By the Commission (Chairman LEVITT and Commissioners WALLMAN, JOHNSON, and HUNT). Jonathan G. Katz Secretary 20/ All of the arguments advanced have been considered. They are rejected or sustained to the extent that they are inconsistent or in accord with the views expressed herein. UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. Admin. Proc. File No. 3-8722 ___________________________________________________ : In the Matter of the Application of : : HERBERT J. BURNS : 1940 Foxfire Court : Bloomfield Hills, Michigan : : For Review of Disciplinary Action Taken by the : : NEW YORK STOCK EXCHANGE, INC. : ___________________________________________________: ORDER SUSTAINING DISCIPLINARY ACTION TAKEN BY NATIONAL SECURITIES EXCHANGE On the basis of the Commission's opinion issued this day, it is ORDERED that the disciplinary action taken by the New York Stock Exchange, Inc. against Herbert J. Burns be, and it hereby is, sustained. By the Commission. Jonathan G. Katz Secretary