==========================================START OF PAGE 1====== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 34-37910 \ October 31, 1996 Admin. Proc. File No. 3-8925 ------------------------------------------------- : In the Matter of the Application of : : LEONARD JOHN IALEGGIO : 2565 Holly Oak Drive : Danville, California 94506 : : 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 the Rules of Fair Practice Conduct Inconsistent with Just and Equitable Principles of Trade Where registered representative and associated person of a member firm requested and retained reimbursement for expenses he did not incur and induced member's parent company to pay club initiation fees when he was not entitled to such payment, held, association's findings of violation sustained, but sanctions vacated and proceeding remanded for reconsideration of sanctions. APPEARANCES: Alvin L. Fishman, for Leonard John Ialeggio. T. Grant Callery and Norman Sue, Jr., for the National Association of Securities Dealers, Inc. Appeal filed: January 11, 1996 Last brief filed: April 17, 1996 I. Leonard John Ialeggio, formerly an Agency Manager and Vice President of Marketing at Home Life Insurance Company ("Home ==========================================START OF PAGE 2====== Life" or "Company"), and a registered representative at W.S. Griffith & Co., Inc., Home Life's broker-dealer subsidiary and National Association of Securities Dealers, Inc. ("NASD") member, has appealed from disciplinary action. The NASD found that during the time Ialeggio served as the Vice President of Marketing, Ialeggio requested and received from Home Life reimbursement for expenses he did not incur. In addition, the NASD found that Ialeggio induced Home Life to pay $35,000 for country club initiation fees, when he was not entitled to such payment. The NASD concluded that this misconduct violated Article III, Section 1 of the NASD's Rules of Fair Practice ("NASD Rules"). 1/ The NASD censured Ialeggio, fined him $15,000, and ordered that he requalify as a general securities representative. 2/ Our findings are based on an independent review of the record. II. Ialeggio served as the Agency Manager for Home Life's San Francisco branch from May 1979 to September 1987. 3/ In October 1987 Ialeggio was transferred to New Jersey where he worked as Vice President of Marketing. Ialeggio returned to manage the San Francisco branch in October 1989. 4/ The record reflects that the compensation of an Agency Manager was paid from a variety of sources. One was commissions on various products that the Agency Manager was responsible for selling. Those commissions were paid into a "compensation account." Additionally, 6% of first-year premium income was set aside in a "contingency override account." The final account from which compensation was paid was the "expense distribution system" ("EDS") account; this account was funded with an additional 70% of the first-year premium income. The actual expenses of running the office were paid from the EDS account; agency-related business expenses not chargeable directly to the company (such as recruitment expenses) were paid from the 1/ The NASD recently renumbered the NASD Rules and revised certain of these rules; no substantive change was made to Article III, Section 1 [new Rule 2110], which requires that members must "observe high standards of commercial honor and just and equitable principles of trade." 2/ The NASD also assessed costs. 3/ An Agency Manager was responsible for the operation of an individual branch office. 4/ Ialeggio agreed to accept the New Jersey position on the condition that he retain his position as San Francisco Agency Manager and ultimately return to those duties. ==========================================START OF PAGE 3====== contingency override account. The record reflects that, if the EDS was funded inadequately, the Agency Manager would cover any deficit by transferring funds from the contingency override account to the EDS account. During the period at issue, an Agency Manager, at the end of the business year, could transfer into the Agency Manager's compensation account, for his personal use, all unspent funds in the contingency override account and 40% of unspent funds in the EDS account. An on-site audit, conducted by Home Life's auditing department in February 1990, discovered that, between September 1988 and February 1990, Ialeggio submitted numerous expense vouchers to Home Life that included requests for reimbursement of travel expenses that previously had been billed to a company credit card. Accordingly, seventeen "expense account" checks written to and deposited by Ialeggio between October 1988 and April 1990 were for amounts in excess of expenses Ialeggio in fact incurred; the total of excess payments was just under $10,000. 5/ The audit also uncovered that in July 1989 Ialeggio had induced Home Life to pay a personal expense -- a country club initiation fee -- by directing an account administrator to prepare two check requests for the withdrawal of funds from Ialeggio's contingency override account. Both checks were addressed to Black Hawk Corp. and each was in the amount of $17,500. Ialeggio furnished two invoices to Home Life with his withdrawal requests; each invoice specified that the payment was for "placement fees." 6/ It is stipulated that the checks were to cover the $35,000 Black Hawk Country Club ("Black Hawk") initiation fees payable by Ialeggio and his family. III. A. Ialeggio admits that he requested and received reimbursement for expenses that he did not incur. Ialeggio attempts to excuse this conduct, which occurred over a seventeen- month period, by claiming that it principally was the result of his extremely busy travel schedule and of Home Life's poorly-run financial accounting department. 5/ The complaint lists the total of excess payments as $8,502; the actual sum supported by record documentation and found by the NASD is $9,868.50. 6/ While the NASD implies that the designation "placement fees" was deceptive, there is nothing in the record that establishes either the accepted meaning in the real estate industry or among country club administrators of the term "placement fee," or that Ialeggio prepared (or directed the preparation of) the invoices. ==========================================START OF PAGE 4====== ==========================================START OF PAGE 5====== Ialeggio testified that he traveled extensively in his role as Vice President of Marketing, and that he routinely handed his secretary receipts and ticket stubs upon returning to his office after a trip. The secretary then prepared a reimbursement voucher for Ialeggio's signature. Ialeggio suggests that he signed the vouchers without reviewing their substance, and protests that such inattention cannot amount to a violation of NASD Rules. Ialeggio also points out that, before the period at issue, Home Life's accounting department had rejected certain reimbursement requests. Ialeggio argues from this that he reasonably assumed that the accounting department would continue to bring to his attention any discrepancies in his reimbursement requests. Ialeggio claims that it was only after the period at issue that he discovered that such reliance was unreasonable, given the "ineffectiveness" of the accounting department at Home Life. 7/ Ialeggio asserts that if the accounting department had been operated properly, the duplicate billings would have been identified in a timely manner. We cannot agree with Ialeggio that his receipt of a total overpayment of just under $10,000 made in seventeen checks over a one-and-one-half-year period reasonably could be overlooked. 8/ We agree, rather, with the District Business Conduct Committee ("District Committee") that "over that period of time he must have realized that he wasn't paying the expenses himself, yet was being reimbursed for them." 9/ We conclude that, under 7/ Testimony before the District Business Conduct Committee supports Ialeggio's characterization of the accounting department. For example, Home Life's former president testified that "the procedures in the finance area of the agencies could have been better." Ialeggio has submitted to us an affidavit not previously adduced before the NASD that further describes the "ineffectiveness" of Home Life's procedures for processing and paying expense account reimbursement requests. We decline to adduce the affidavit, given its cumulative content. See Commission Rules of Practice, Rule 452, 17 C.F.R. 201.452. 8/ The amount of the overpayment is about 25% of the aggregate sum of these reimbursement checks (when a $25,800 lump sum payment for Ialeggio's moving expenses is excluded). 9/ Ialeggio advised the National Business Conduct Committee that "[he] was on the road so much [he] very rarely saw those checks. Those checks were deposited right to a New (continued...) ==========================================START OF PAGE 6====== all the circumstances, retention of these funds constituted conduct inconsistent with Article III, Section 1 of the NASD's Rules. 10/ B. Ialeggio also admits that he arranged for Home Life to pay the $35,000 initiation fee to Black Hawk for himself and his family with funds withdrawn from his contingency override account. 11/ Testimony before the District Committee established that, as a matter of policy, Home Life would not pay for employees' country club initiation fees. 12/ The record 9/(...continued) Jersey bank account." The record before us, however, reflects that Ialeggio personally endorsed for deposit the majority of the checks at issue. 10/ Cf. Timothy L. Burkes, 51 S.E.C. 356, 359-60 (1993), aff'd, 29 F.3d (9th Cir. 1994) (Table) (sustaining NASD determination that registered representative who caused commissions to which he was not entitled to be improperly credited to his account violated Article III, Section 1 of NASD Rules); Buchman v. SEC, 553 F.2d 816, 821 (2nd Cir. 1977) (breach of contract violated Article III, Section 1 of NASD Rules where bad faith or unethical conduct evidenced). 11/ The February 1990 audit also disclosed that Ialeggio, around the time that he requested payment of the initiation fee, arranged for Home Life to transfer $148,875 to his San Francisco branch's contingency override account. In compliance with this request, Home Life's accounting department caused five payments totalling $148,875 to be credited to this account between April 26, 1989 and September 22, 1989. Ialeggio testified that this sum represented money owed to Ialeggio in lieu of losses that Ialeggio's branch office sustained because of his temporary assignment to the home office in New Jersey. While the NASD complaint did not allege that Ialeggio engaged in any misconduct in requesting this transfer to the contingency override account, the NASD's counsel elicited before the District Committee testimony about Ialeggio's payment requests. We have considered such testimony solely to establish the source of the funds in the contingency override account. 12/ Ialeggio is correct that the testimony at the District Committee hearing demonstrated that Home Life management had varied understandings of the function and operation of the contingency override account. For instance, one witness stated that, because there were changes in the plan over the years, he could not be specific regarding operation of the (continued...) ==========================================START OF PAGE 7====== also demonstrates that the contingency override account was established to fund agency-related business expenses not chargeable directly to the company. The $35,000 fee at issue was not such an expense. Ialeggio would have us conclude that Home Life's purportedly "flexible" approach to administration of the contingency override account somehow exonerates him. While Home Life may not have challenged the propriety of employees' questionable reimbursement requests, 13/ registered persons are expected to adhere to a standard higher than "what they can get away with." We conclude that the record establishes that Ialeggio, through use of a "back door" means (the contingency override account), induced Home Life to pay his country club initiation fee -- a personal expense that would have been immediately rejected for reimbursement had it been submitted directly to the Company. By this conduct, Ialeggio acted at least unethically, and thus violated Article III, Section 1 of the NASD Rules. In so concluding, we reject Ialeggio's assertion that directing the account administrator to pay this personal expense from the contingency override account was not improper given that unspent funds in that account could be transferred to the Agency Manager's personal bank account at year-end. The fallacy in Ialeggio's logic is that Ialeggio's request for payment from the contingency account did not occur at year-end. IV. While Ialeggio concedes the NASD's jurisdiction to disci- pline him for misconduct, he contends that the NASD should have declined to apply its Rules of Fair Practice to the conduct at issue. He asserts, among other things, that the alleged miscon- duct concerns matters involving Home Life internal policies that are unrelated to the securities industry, and therefore should not be the focus of the NASD's regulatory attention. 14/ 12/(...continued) contingency account. The testimony was quite clear, however, that, while there were instances where country club bills -- incurred in entertaining a client, for example -- were paid if they were business-related, the company would not pay employees' country club initiation fees. 13/ Ialeggio, for instance, claims that other managers withdrew funds from Home Life's contingency accounts for such personal expenses as weddings and automobiles. 14/ Ialeggio emphasizes his point by noting that the NASD was unable to command the appearance before the District Committee of potential witnesses who were not associated persons. ==========================================START OF PAGE 8====== We consistently have held that misconduct not related directly to the securities industry nonetheless may violate Article III, Section 1 of the NASD Rules. 15/ Moreover, we are not persuaded that this proceeding represents an injudicious exercise of the NASD's discretion simply because no customer was involved and no customer's funds were jeopardized or misappropriated. 16/ Ialeggio's actions cast doubt on his commitment to the fiduciary standards demanded of registered persons in the securities industry and thus properly are the subject of NASD disciplinary action. 17/ 15/ See, e.g., Thomas E. Jackson, 45 S.E.C. 771, 772 (1975) ("Although [respondent's] wrongdoing in this instance [forging signatures on insurance applications to obtain commissions] did not involve securities, the NASD could justifiably conclude that on another occasion it might."). 16/ Compare Seaton v. SEC, 670 F.2d 309, 311 (D.C. Cir. 1982) (affirming Commission's determination to sustain sanctions imposed for violation of Article III, Section 1, "despite the fact [that] there was no finding [of fraud or] harm to any investor," in light of Commission's explanation that the "pattern of dishonesty" in petitioner's dealings was a matter "of serious concern affecting the public interest"). 17/ See, e.g., Henry E. Vail, Securities Exchange Act Rel. No. 35872 (June 20, 1995), 59 SEC Docket 1805, appeal filed, No. 95-60502 (5th Cir.) (involvement of customer or customer funds not necessary to find a violation of Article III, Section 1 of the NASD Rules); Timothy L. Burkes, 51 S.E.C. at 359-60 (violation of Article III, Section 1 where associated person caused unearned commissions to be improperly credited to his commission account); Thomas R. Alton, Securities Exchange Act Rel. No. 36058 (August 4, 1995), 59 SEC Docket 2978, appeal filed, No. 95-70715 (9th Cir.) (misrepresentations included in securities professionals' registration form violated Article III, Section 1). We have determined not to accept the NASD's surreply brief dated April 23, 1996, which cites to and includes as an attachment this Commission's brief in the Vail matter. Ialeggio also suggests that Article III, Section 1 is vague. This assertion has been repeatedly rejected. See, e.g., Conrad C. Lysiak, Securities Exchange Act Rel. No. 33245 (Nov. 24, 1993), 55 SEC Docket 1617, 1625 n. 24, aff'd, 47 F.3d 1147 (9th Cir. 1995). ==========================================START OF PAGE 9====== V. Ialeggio claims that, when the National Business Conduct Committee ("National Committee") sustained the sanctions imposed by the District Committee, it did so on consideration of alleged misconduct that was not charged in the underlying complaint. Ialeggio posits that, had the National Committee considered only the violations properly before it, the National Committee might have determined to exercise its authority to reduce or remit entirely the sanctions imposed by the District Committee. It appears that the National Committee made findings as to a violation that was not charged in the NASD's complaint, or explored adequately at the District Committee hearing or before the National Committee. It also appears that the National Committee highlighted that found-but-not-charged misconduct in determining to affirm what it considered the District Committee's "relatively lenient sanctions." 18/ Accordingly, we have 18/ We agree with Ialeggio's assertion that, while information was elicited before the District Committee regarding the contingency override account credits, the purpose was to establish the source of the $35,000 paid, at Ialeggio's directive, to Black Hawk. As Ialeggio correctly states, No findings were made by the DBCC and presumably no weight was given to any testimony regarding the propriety of the contingency account credits or [Ialeggio's] credibility concerning these contingency account credits. The contingency account credits were properly not considered [by the DBCC] in determining the appropriate sanctions to be levied for the conduct [charged] in the Association's Complaint. The National Committee, in contrast, found as follows: As to what we consider the far more serious allegation of cause one, it is clear that Ialeggio, lacking corporate agreement to reimburse him for about $148,000 in pre- existing branch office expenses, undertook by means of self-help to even the score. . . . These credits (totalling $148,000) were never authorized by Home Life, and Ialeggio has not produced a scintilla of evidence apart from his own testimony that they were. . . . We thus believe that by directing the entry of the unauthorized credits, Ialeggio wrongfully (continued...) ==========================================START OF PAGE 10====== determined to remand this matter for consideration of an appropriate sanction for the violations sustained here. An appropriate order will issue. 19/ By the Commission (Chairman LEVITT and Commissioners JOHNSON and HUNT); Commissioner WALLMAN not participating. Jonathan G. Katz Secretary 18/(...continued) increased his potential personal compensation by $148,000. The National Committee went on to find that the evidence suggested that "in causing the unauthorized credits to the contingency account to be made and in submitting the misleading [Black Hawk] invoices, Ialeggio was consciously operating to benefit his personal interest rather than any purported interest of his company." 19/ 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 views expressed herein. UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. 34-37910 \ October 31, 1996 Admin. Proc. File No. 3-8925 : In the Matter of the Application of : : LEONARD JOHN IALEGGIO : 2565 Holly Oak Drive : Danville, California 94506 : : For Review of Disciplinary Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : : ORDER SUSTAINING FINDINGS OF REGISTERED SECURITIES ASSOCIATION, VACATING SANCTIONS, AND REMANDING FOR RESANCTIONING On the basis of the Commission's opinion issued this day, it is ORDERED that the findings made by the National Association of Securities Dealers, Inc. against Leonard John Ialeggio, be, and they hereby are, sustained, and it is further ORDERED that the sanctions imposed on Ialeggio be, and they hereby are, vacated, and this proceeding be, and it hereby is, remanded to the Association for resanctioning. By the Commission. Jonathan G. Katz Secretary