SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 40629 / November 3, 1998 Admin. Proc. File No. 3-9378 : In the Matter of the Application of : : WARREN R. SCHREIBER : 430 Chestnut Drive : East Hills, New York 11576 : : For Review of Disciplinary Action Taken by : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : OPINION OF THE COMMISSION REGISTERED SECURITIES ASSOCIATION -- REVIEW OF DISCIPLINARY PROCEEDINGS Remand for Clarification of Basis for Credibility Findings No deference could be given to the initial fact-finder's very general credibility findings where the fact-finder's decision does not reflect whether the fact-finder, in making these findings, considered a substantial amount of record evidence that appears to contradict them. Held, sanctions vacated and proceeding remanded for clarification of the basis for fact- finder's credibility findings. APPEARANCES: Anthony W. Djinis and Paul J. Bazil, of Pickard & Djinis, for Warren R. Schreiber. Alden S. Adkins and Norman Sue, Jr., for NASD Regulation, Inc. Appeal filed:August 27, 1997 Last brief filed: January 6, 1998 I. Warren R. Schreiber, formerly a registered securities principal and a general securities representative at Castleton-Rhodes, Inc. ("Castleton"), a member of the National Association of Securities Dealers, Inc. ("NASD"), appeals from NASD disciplinary action. The NASD found that, in the last quarter of 1989, Schreiber violated Article III, Sections 1, 13, and 18 of the NASD's Rules of Fair Practice ("NASD Rules"); [1] Schedule E of the NASD's By- Laws; [2] and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [3] and Rule 10b-5 thereunder [4]. Specifically, the NASD determined that Schreiber knowingly (1) participated in the unregistered distribution of common stock and warrants of Merlin Baines, Inc. ("Merlin"), a blind pool corporation, [5] (2) employed manipulative and deceptive practices in connection with the acquisition of the stock and warrants to obtain control of Merlin and manipulate the price of the stock, (3) recommended and effected the purchase of Merlin stock while in possession of material, nonpublic information, (4) engaged in securities transactions with or on behalf of customers without disclosing that Castleton and Merlin were under common control, and (5) engaged in an improper distribution of equity securities issued by an affiliate of Castleton. The NASD censured Schreiber, fined him $100,000, barred him from associating with any NASD member in any capacity, and assessed Schreiber hearing costs of $23,054.46 jointly and severally with Castleton, and appeal costs of $750. To the extent we make findings in this matter, we base them on an independent review of the record. II. Throughout this proceeding, Schreiber has maintained that he did not engage in the violative conduct at issue. Before us Schreiber asserts that the NASD's case against him is based on "a credibility struggle between Mr. Schreiber and his accuser, Jules Lipow." Schreiber further asserts that the Market Surveillance Committee ("MSC"), the initial fact-finder here, "improperly failed to evaluate the reliability, probative value and fairness of use of the numerous eyewitnesses whose testimony (either by affidavit or by investigative testimony) is plainly in the record in this case," and that this testimony corroborates his own testimony and contradicts Lipow's. While we, in conducting our de novo review of a record on appeal, accord considerable weight and deference to the credibility determinations of the initial decision-maker when such determinations are based on hearing the witnesses' testimony and observing their demeanor, [6] we do not accept them blindly. We have stated, for example, that where the record contains "substantial evidence" providing a basis for disregarding a credibility determination we will do so. [7] For the reasons discussed below, we cannot defer to the MSC's credibility "findings" regarding Lipow and Schreiber because the decision does not reveal whether the NASD, in making those findings, took into account all of the evidence that appears in this record. [8] We accordingly remand for clarification of the basis for these findings. **FOOTNOTES** [1]: Article III, Section 1 of the NASD Rules requires that members "observe high standards of commercial honor and just and equitable principles of trade." Article III, Section 13 requires that members disclose control relationships with issuers of securities to their customers before entering into any contract for the purchase or sale of such securities. Article III, Section 18 provides that "[n]o member shall effect any transaction in, or induce the purchase or sale of, any security by means of any manipulative, deceptive or other fraudulent device or contrivance." Article III, Sections 1, 13, and 18 have been renumbered, respectively, as NASD Conduct Rules 2110, 2240 and 2120. [2]: Schedule E of the NASD's By-Laws provides that no member may participate in a public distribution of securities of a company "if the member and/or its associated persons, parent or affiliates have a conflict of interest with the company, [ ] except in accordance with this Schedule." Schedule E of the NASD's By-Laws has been renumbered as NASD Conduct Rule 2720. [3]: 15 U.S.C. 78j(b) [4]: 17 C.F.R. 240.10b-5 [5]: A blind pool corporation does not have current operations. It is organized to evaluate and effectuate mergers with or acquisitions of other companies (or acquisitions of assets) that are as yet unidentified. See, e.g., Robert A. Amato, 51 S.E.C. 316, 317 n.5 (1993), aff'd, 18 F.3d 1281 (5th Cir. 1994), cert. denied, 513 U.S. 928 (1995). [6]: Jonathan Garrett Ornstein, 51 S.E.C. 135, 137 (1992). [7]: Anthony Tricarico, 51 S.E.C 457, 460 (1993), and cases there cited. [8]: Compare Mark James Hankoff, 50 S.E.C. 1009, 1012 (1992)(in evaluating reliability of hearsay evidence, possible bias of declarant, contradictory direct testimony, and corroborative evidence, among other matters, must be considered). III. A. The MSC relied principally on Lipow's testimony in making its findings against Schreiber. Its acceptance of Lipow's version of events as they related to Schreiber is prefaced by the general statement that "[t]he Committee believes that Lipow's testimony generally was credible as it related to the substantial roles played by Schreiber, Cahill and Lipow." While a generalized finding of credibility may well be sufficient in some instances, in this case the MSC decision did not address a substantial amount of evidence that appears to contradict the finding that Lipow was credible. As an initial matter, the record casts some doubt on the reliability of Lipow's testimony. The MSC does not address in its decision Lipow's admitted drug use during the time of the Merlin transactions or whether it considered any impact such drug use might have had on Lipow's ability to recollect events. Additionally, the MSC's decision does not address the hearing panel's apparent frustration with the quality of Lipow's testimony. During Lipow's cross-examination the hearing panel chairman observed that Lipow's "memory seems to increase at certain times during certain questions . . . ." Subsequently, that same panelist commented to the NASD staff witness who testified after Lipow, "[a]fter Mr. Lipow's testimony, I do appreciate Ms. Armour's exacting testimony, it's been a pleasure." Further, the MSC's decision does not explain its determination to accept Lipow's version of events with regard to Schreiber's involvement in the Merlin transactions but not to credit Lipow concerning the extent of involvement of another respondent, Hershall Krasnow. In the face of both what Lipow represented were contemporaneous notes reflecting Krasnow's allegedly central role and Lipow's direct testimony about Krasnow's role, the MSC found that there was "insufficient evidence to implicate Krasnow as a knowing participant in the illegal distribution" of Merlin securities. [9] B. Similarly, the MSC's finding that Schreiber was not credible is also quite general. The decision states conclusorily: "The Committee did not find Schreiber's denials or his testimony in general to be credible." We cannot discern from the decision whether this "finding" took into account the sizable number of affidavits Schreiber submitted into evidence that corroborate Schreiber's testimony -- and contradict Lipow's -- on key points. The NBCC decision, as well, omits reference to these affidavits. [10] The NASD had the opportunity to clarify this issue, but did not take it. Prior to the NBCC hearing in this matter, Schreiber filed a motion for remand to the MSC. Schreiber contended that the MSC had failed "to consider the affidavit testimonies of numerous witnesses," and requested that the proceeding be remanded so that the MSC could reconsider its decision "in light of all of the relevant evidence admitted before the Committee." Schreiber further requested that, in the event this motion was denied, he be permitted to adduce before the NBCC at an extended hearing Cahill's testimony. The NBCC refused Schreiber's requests. One of the reasons the NBCC cited for its refusal to hear the proffered testimony of Cahill, who the NBCC described as being "in the lead" in the Merlin scheme, was that counsel for Schreiber was not timely in his request to adduce additional evidence. From the record it appears, however, that the request was a timely one made in accordance with the NASD Code of Procedure. [11] IV. Because the initial fact-finder's opinion in this matter includes only general credibility findings and does not discuss the substantial amount of record evidence that appears to contradict these findings, we cannot reasonably defer to them. Accordingly, we vacate the sanctions imposed and remand this proceeding to the NASD for explicit discussion of the issues we **FOOTNOTES** [9]: The MSC decision also does not address Lipow's demeanor during the hearing or any bias Lipow might have had against Schreiber that would bear upon his credibility, yet Schreiber and Lipow exhibited open animosity toward each other at the MSC hearing. [10]: The NASD staff, in an opposition to Schreiber's request that we stay his sanction pending our review in this matter, characterized the affidavits at issue as "extra-record affidavits of peripheral individuals whose hearsay statements prove nothing actually exculpatory, . . . or who, as co-conspirators capable of the most serious frauds, deserve no credence whatsoever . . . ." The NASD staff further advised us that the affiants' "post-proceeding statements are not part of the record for consideration in this action." Contrary to these contentions, the affidavits were accepted into evidence on Schreiber's motion at the MSC hearing and each is part of the record in this matter. [11]: NASD Code of Procedure Article III, Section 3(a) (renumbered as Section 9312(a)) requires that a request to adduce additional evidence must be made no later than 10 days prior to the date of the NBCC hearing. Schreiber's Motion to Adduce Additional Evidence was dated February 14, 1996 and the hearing took place on July 9, 1996. have addressed here. In ordering the remand, we express no view on either the NASD's ultimate credibility determinations or the outcome of this proceeding. An appropriate order will issue. [12] By the Commission (Chairman LEVITT and Commissioners JOHNSON, HUNT, CAREY and UNGER). Jonathan G. Katz Secretary **FOOTNOTES** [12]: All of the arguments 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. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 40629 / November 3, 1998 Admin. Proc. File No. 3-9378 ----------------------------------------------------------------- : In the Matter of the Application of : : WARREN R. SCHREIBER : 430 Chestnut Drive : East Hills, NY 11576 : : For Review of Disciplinary Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : : ORDER REMANDING DISCIPLINARY PROCEEDING On the basis of the Commission's opinion issued this day, it is ORDERED that the sanctions imposed by the National Association of Securities Dealers, Inc. against Warren R. Schreiber in this proceeding be, and they hereby are vacated, and it is further ORDERED that this proceeding be, and it hereby is, remanded to the National Association of Securities Dealers, Inc. for further proceedings in accordance with that opinion. By the Commission. Jonathan G. Katz Secretary