SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 39007 / September 3, 1997 Admin. Proc. File No. 3-9281 : In the Matter of the Application of : : HERBERT GARRETT FREY : 5710 Wooster Pike, Suite 222 : Cincinnati, Ohio 45227 : : 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 Rules of Fair Practice Failure to Pay Arbitration Award Registered representative of a member firm of registered securities association failed to honor an arbitration award made against him. Held, association's findings of violation and sanctions it imposed are sustained. APPEARANCES: Herbert Garrett Frey, pro se. Alden S. Adkins and Jeffrey S. Davis, for NASD Regulation, Inc. Appeal filed: March 25, 1997 Briefing completed: June 16, 1997 I. Herbert Garrett Frey, a registered general securities representative and general securities principal currently associated with Kohn Financial Corporation, a member of the National Association of Securities Dealers, Inc. ("NASD"), appeals from NASD disciplinary action. The NASD found that Frey violated Article III, Section 1 of the NASD Rules of Fair Practice (the "Rules") <(1)> by failing to honor an arbitration award entered <(1)> The NASD recently revised and renumbered its Rules of Fair Practice. Article III, Section 1 of the Rules [new Rule 2110] requires the observance of high (continued...) against him in 1990. The NASD censured Frey and suspended him from associating with any member of the Association in any capacity until 180 days after he submits proof that he has paid the arbitration award or that he has been released from further obligation to pay it. Our findings are based on an independent review of the record. II. In September 1986, Frey advised Mary Ellen Powers, a 79- year-old widow, to invest $29,000 in unrated debentures of American Continental Corporation ("ACC"). Powers used the bulk of her savings to purchase the ACC debentures. In April 1989, ACC filed a petition for bankruptcy protection and stopped making interest payments on the debentures. <(2)> Powers brought an arbitration action against Frey and Queen City Securities Corporation ("Queen City" or the "Firm"), the member firm of which Frey was president. Powers claimed that Frey made material misrepresentations, failed to comply with suitability requirements, never explained material information regarding ACC, and failed to disclose Frey's, as well as Queen City's, interest in the ACC bonds. Frey responded that he discussed several investments with Powers and that she made an independent investment decision to purchase ACC debentures. In August 1990, the arbitration panel found in Powers' favor and awarded her $29,870, jointly and severally against Frey and Queen City. Powers brought an action in an Ohio Court of Common Pleas to confirm the award. The court found that the "award is in all respects legal and proper and that the defenses raised to Plaintiff's application are without merit." On March 13, 1991, the court confirmed the award and held Frey and Queen City jointly and severally liable for that amount. Frey did not pay the award. On behalf of himself and Queen City, he appealed the judgment to the Ohio Court of Appeals. He argued that the lower court erred in confirming the arbitration award because the action was brought by Powers' estate, rather than by the executrix of the estate, the real party in interest. The Court of Appeals determined that Frey had failed to raise this argument below and, therefore, had waived any right to assert this issue as error on appeal. Frey also argued that the lower court erred when it entered judgment based on the unsigned arbitration award improperly submitted by Powers. The Court of Appeals found that Frey and Queen City could not dispute the authenticity of the award, noting that, in the court below, no question of authenticity was raised, and that all parties conducted themselves as if the document submitted genuinely reflected the decision and award of the arbitration panel. The Court of Appeals affirmed the entry of judgment confirming the arbitration award. <(1)>(...continued) standards of commercial honor and just and equitable principles of trade. <(2)> Powers died in the fall of 1989. Her interests in this matter were represented thereafter by her estate. The term "Powers" includes Powers' estate. ======END OF PAGE 2====== Frey did not pay the award. Instead, he sued the executrix of Powers' estate for defamation and slander based on statements made in connection with the arbitration proceeding. This suit was dismissed in September 1991. Frey also pursued an appeal of the award confirmation to the Ohio Supreme Court. In October 1992, that court dismissed Frey's appeal. Frey had exhausted his state court remedies to challenge the arbitration award, but did not pay the award. Frey also challenged a second arbitration award entered in 1990 on behalf of another client, Karen A. Prior ("Prior") for $19,106. As he did with Powers, Frey appealed Prior's arbitration award to the Ohio Supreme court. Frey also sued Prior in federal court for libel and slander, and sought one million dollars in damages. Frey was unsuccessful in both matters. <(3)> On December 20, 1993, the NASD brought a disciplinary action against Frey as a result of his failure to pay the two arbitration awards. Frey admitted in his answer that the two arbitration awards had been issued and that he did not pay them. However, he sought to attack the validity of the arbitration awards on much the same grounds as he had in the state court litigation. Frey also asserted, among other things, that Powers had elected to pursue alternate remedies through litigation with ACC, and that he was unable to pay the award. On December 2, 1994, the District Business Conduct Committee ("District Committee") concluded that Frey violated Article III, Section 1 of the Rules by failing to pay the arbitration awards. The District Committee added that Frey had engaged in egregious misconduct in abusing the arbitration process, warranting substantial sanctions. The District Committee ordered that Frey be censured, fined $20,000, assessed costs of $1,219, and suspended from association with any member of the Association in any capacity for 90 days, with his suspension to continue until he submits proof to the District Office that his arbitration awards have been satisfied or that he has been relieved from further obligation to pay the awards. Frey did not pay the awards. Rather, he appealed the District Committee's decision on the day it was issued. The National Business Conduct Committee ("National Committee") stayed Frey's appeal when, on January 6, 1995, Frey filed a bankruptcy petition under Chapter 7 of the United States Bankruptcy Code. Among the debts Frey listed as eligible for discharge in his bankruptcy petition were the two arbitration awards and the sanctions the District Committee had imposed on him. On July 1, 1996, a bankruptcy court in the Southern District of Ohio discharged all debts listed in Frey's bankruptcy petition other than Powers' arbitration award. On July 25, 1996, that court ordered that Powers' arbitration award was non-dischargeable under 11 U.S.C.  523(a)(2)(A) because Frey knowingly made material, false representations to induce Powers to purchase ACC debentures. <(4)> In addition, the <(3)> As discussed below, Prior's award subsequently was discharged in bankruptcy. <(4)> Frey told Powers that the ACC Investment was "97% safe" and that his own mother had bought these bonds. ======END OF PAGE 3====== court found that Frey's conduct inflicted a willful and malicious injury on Powers. The National Committee resumed processing Frey's appeal. Frey challenged the District Committee's findings, asserting that the underlying award was invalid, that Powers had already been made whole, that he was denied due process, and that the sanctions assessed by the District Committee did not survive Frey's subsequent bankruptcy discharge. Frey also claimed that he was unable to pay the award. The National Committee determined that Frey had violated NASD Rules when he failed to pay the two arbitration awards. While acknowledging that the bankruptcy court's July 1, 1996 order discharged the District Committee's fine, imposition of costs, and the Prior arbitration award, the National Committee found that the Powers award survived Frey's bankruptcy discharge. The National Committee determined that there were no mitigating factors. It sustained Frey's censure and increased his suspension, effective immediately and continuing for 180 days following Frey's submission of proof that he has paid Powers' arbitration award or that he has been released from further obligation to pay it. III. Frey reiterates before us many of the claims that he has made throughout his seven-year challenge to his obligation to pay this award. For example, Frey contends that Powers' arbitration award is not valid because according to Ohio law, an estate cannot bring an arbitration proceeding. <(5)> He asserts once again that the arbitration award is void because the award was not signed. <(6)> As we have said on numerous occasions, an applicant may not collaterally attack an arbitration award in a disciplinary proceeding for failure to pay that award. <(7)> The Board of Governors of the NASD has adopted a Resolution to promote, among other things, the prompt payment of arbitration awards. <(8)> To permit a party dissatisfied with an <(5)> Frey also contends that the award is not valid because the attorney who represented Powers' estate also represented the individual who perpetrated the ACC fraud. The appropriate forum for raising such a claim was the Ohio state court system. <(6)> We note that, while Frey submitted a typed, unsigned version of the arbitration award, a handwritten copy of the arbitrators' award, signed by the three arbitrators, is also in the record. <(7)> See, e.g., John G. Pearce, Securities Exchange Act Rel. No. 37217 (May 14, 1996), 61 SEC Docket 2765, 2768; Peter Thompson Higgins, 51 S.E.C. 865, 868 n.11 (1993). <(8)> The Code of Arbitration Procedure, Resolution of the Board of Governors stated [new IM-10100]: (continued...) ======END OF PAGE 4====== arbitration award to attack it collaterally in a subsequent disciplinary proceeding would subvert the salutary objective that the Resolution seeks to promote. <(9)> Frey also claims that Powers already has collected $52,255.36 in connection with the ACC bankruptcy recovery and class action suit, and that therefore Powers should not be allowed a double recovery by collecting from him as well. <(10)> The bankruptcy court, however, determined that Frey is not entitled to an offset of damages as a result of funds Powers received from ACC's bankruptcy and the class action against ACC. Moreover, the NASD informed Powers that he was responsible for paying the entire arbitration award and could seek redress in another forum if he believed that Powers was receiving excessive compensation. Frey claims that he is insolvent now, and that he has been since 1989. Frey states that he does not "have the funds available to pay Powers anything towards the arbitration award" (emphasis added). <(11)> <(8)>(...continued) It may be deemed conduct inconsistent with just and equitable principles of trade and a violation of Article III, Section 1 of the Rules of Fair Practice for a member or a person associated with a member to fail to . . . honor an award of arbitrators properly rendered pursuant to the Uniform Code of Arbitration under the Auspices of the National Association of Securities Dealers, Inc., . . . where a timely motion has not been made to vacate or modify such award pursuant to applicable law. All awards shall be honored by a cash payment to the prevailing party of the exact dollar amount stated in the award . . . . Awards shall be honored upon receipt thereof, or within such other time as may be prescribed by the award. <(9)> See, e.g., Richard J. Lanigan, Securities Exchange Act Rel. No. 36028 (July 27, 1995), 59 SEC Docket 2693, 2696 n.9; Stix & Co., Inc., 46 S.E.C. 578, 580 (1976). <(10)> The bankruptcy court found that, as of May 28, 1996, Powers received payments from the ACC bankruptcy and class action lawsuit totalling $14,887.11. <(11)> Frey admitted to the District Committee that his wife received approximately $369,000 in connection with the ACC class action and bankruptcy suits. When asked why he did not use some of this money to buy back bonds from clients, such as Powers, Frey responded that "there wasn't any money from that first payment [a portion of the $369,000] that would have been available." Frey also testified that he and his wife were members of a country club. ======END OF PAGE 5====== We have made clear that an applicant bears the burden of demonstrating that he or she does not have the ability to pay an arbitration award. <(12)> Frey submitted his son's college financial aid application and his 1989 tax return. <(13)> The financial aid application contains estimated financial figures from 1993, and his tax form contains financial figures for January through December 1989. This evidence is insufficient to document Frey's present financial status. Frey also refers to the fact that he had to file for bankruptcy in January 1995. Frey's 1995 bankruptcy does not mean that he is currently unable to pay any portion of the award, or unable to arrange for payment in installments. <(14)> Frey could have submitted a variety of information in support of his current claim of insolvency. He failed to do so. Thus, Frey has not met his burden of establishing his inability to pay. Frey also contends that he attempted in good faith to resolve this matter. He references two 1993 letters from his attorney to the NASD stating Frey's willingness to pay the difference between the arbitration award and the amount Powers received from the ACC bankruptcy and the class action suit. <(15)> Frey proposed to pay this limited amount in quarterly <(12)> Bruce M. Zipper, 51 S.E.C. 928, 931 (1993). <(13)> Frey testified before the District Committee that he could not submit his tax forms for 1989 through 1994 because they were not finished. Frey subsequently submitted his 1989 tax form to the National Committee. The National Committee, however, determined not to admit the 1989 tax form into evidence. We have not admitted this document to the record because we find that information from a 1989 tax form is not material to Frey's current ability to pay the award. See Rule 452, 17 C.F.R.  201.452. <(14)> Frey asserts that the NASD cannot "go forward with revocation of my license if the NASD has been properly notified of my Chapter 7 Bankruptcy proceeding." We note that the NASD is not revoking Frey's registration. Frey is suspended until he pays the award, or has been released from paying it, and for 180 days thereafter. Moreover, on July 25, 1996, the bankruptcy court ordered that Powers' arbitration award was non- dischargeable. The bankruptcy court's order is final and the NASD was entitled to rely on it. <(15)> Frey's attorney states in his August 25, 1993 letter that Frey: intends to honor the arbitration awards with the understanding that the Bankruptcy payout and the class action payouts reduce or totally eliminate his (continued...) ======END OF PAGE 6====== payments over a five-year period with interest at six percent on the unpaid balance. We disagree with Frey's characterization of his conduct. The record demonstrates that Frey did not make a good faith effort to pay the award. He was responsible for promptly paying the entire award. <(16)> Yet he offered to pay only a portion of the award. In addition, when asked if he ever tried to pay what he could, Frey stated "no, not unless I have a settlement. I'm not just going to write a check without a settlement." Frey has shown a complete disregard for the arbitration process. He deprived Powers of the use of the bulk of her savings. He engaged in a series of lawsuits to avoid paying this award, including suing the executrix of Powers' estate for defamation and slander. We find that Frey violated Article III, Section 1 of the NASD Rules by failing to pay Powers' arbitration award. <(17)> <(15)>(...continued) obligation and that if he overpays in the case of . . . Powers he has a claim . . . for recovery. <(16)> The NASD informed Frey, in a letter dated January 5, 1993, that: [T]hese [ACC] settlements do not alleviate your responsibility to pay the arbitration awards . . . . The parties made a determination to seek recovery against you and your firm in arbitration and the Claimants prevailed. The Claimants may only collect once and they have elected to collect from you. If you can prove that either Claimant is seeking to make double recovery then you should bring that to the attention of the Special Master or Court who is responsible for allocating monies from the settlement. <(17)> Frey argues that he has "not been afforded due process and equal protection under the law." He does not explain his basis for these arguments, and we can find none. He also contends that the NASD's decision is contrary to the weight of the evidence. The record does not support these contentions. Frey also asserts that NASD Regulation, Inc., a subsidiary of the NASD, violated his civil rights under the Fifth Amendment, the Fourteenth Amendment, and the Supremacy Clause of the United States Constitution by bringing this matter while his federal appeal of the bankruptcy court's decision was pending. We disagree. The NASD is a private organization that operates subject to a scheme of government regulation by self-regulatory organizations. Many courts and this Commission have determined that such self- regulatory organizations are not subject to many of the (continued...) ======END OF PAGE 7====== IV. The NASD's Code of Arbitration Procedure is designed to provide a mechanism for the speedy resolution of disputes among members, their employees, and the public. <(18)> Failure to make prompt, good faith efforts to pay an arbitration award constitutes conduct inconsistent with just and equitable principles of trade. <(19)> The NASD has advised in a Resolution of the Board of Governors that arbitration awards shall be paid "upon receipt," in full, and in cash, thus underscoring its view of the importance of prompt payment of arbitration awards. <(20)> Here, the arbitration panel rendered its decision nearly seven years ago. After exhausting all of his state court remedies to challenge the award, Frey did not pay it. Frey has not even made a partial payment. Instead, he has engaged in numerous maneuvers to avoid paying this award. He has not demonstrated that he is unable to pay the award. Under the circumstances, we do not conclude that the sanctions imposed by the NASD are excessive or oppressive. <(21)> An appropriate order will issue. <(22)> <(17)>(...continued) requirements applicable to a government agency. See, e.g., Jones v. SEC, 115 F.3d 1173, 1183 (4th Cir. 1997) (Double Jeopardy Clause of Fifth Amendment is not implicated by NASD disciplinary proceeding because NASD is a private corporation and not a governmental agency); 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); Daniel Turov, 51 S.E.C. 235, 238 (1992) (Fifth, Sixth, and Seventh Amendments to the United States Constitution do not apply to New York Stock Exchange, which is not a government agency). <(18)> See, e.g., James M. Bowen, 51 S.E.C. 1152, 1153 (1994); Stix & Co., Inc., 46 S.E.C. 578, 579 (1976). <(19)> See Eric M. Diehm, 51 S.E.C. 938, 939 (1994); Bruce M. Zipper, 51 S.E.C. 928, 929 (1993). <(20)> See supra note 8. <(21)> Frey requests that we enjoin NASD Regulation, Inc. from taking any further action against him. We deny Frey's request. Section 19(e) of the Securities Exchange Act, pursuant to which this application is reviewed, does not authorize us to enjoin the NASD. Even if it did, Frey has offered no basis for us to take such action. <(22)> 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 in this opinion. ======END OF PAGE 8====== By the Commission (Chairman LEVITT and Commissioners WALLMAN, JOHNSON, and HUNT). Jonathan G. Katz Secretary ======END OF PAGE 9====== UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. Admin. Proc. File No. 3-9281 : In the Matter of the Application of : : HERBERT GARRETT FREY : 5710 Wooster Pike, Suite 222 : Cincinnati, Ohio 45227 : : For Review of Disciplinary Action Taken 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 Herbert Garrett Frey be, and it hereby is, sustained. By the Commission. Jonathan G. Katz Secretary