SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 40673 / November 12, 1998 Admin. Proc. File No. 3-9554 ___________________________________________________ : In the Matter of the Application of : : WILLIAM J. HABERMAN : c/o Michael A. Hatch, Esq. : Hatch, Eiden & Pihlstrom : 120 South Sixth Street -- Suite 850 : Minneapolis, Minnesota 55402 : : For Review of Denial of a Member's : Continuance Application by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : ___________________________________________________: OPINION OF THE COMMISSION REGISTERED SECURITIES ASSOCIATION -- REVIEW OF DENIAL OF MEMBER'S APPLICATION FOR ASSOCIATION Registered securities association denied member firm's application to retain its membership if it employed as a registered representative an individual who is subject to a statutory disqualification resulting from a felony conviction for money laundering. Held, appeal proceedings are dismissed. APPEARANCES: Michael A. Hatch and Kristine L. Eiden, of Hatch, Eiden & Pihlstrom, for William J. Haberman. Alden S. Adkins, Susan L. Beesley, and Jeffrey S. Davis, for NASD Regulation, Inc. Appeal filed: March 6, 1998 Last brief received: June 25, 1998 I. William J. Haberman appeals from the denial by the National Association of Securities Dealers, Inc. ("NASD") of an application by Gardner Financial Services, Inc. ("Gardner") to remain an NASD member if it becomes associated with Haberman. The NASD denied Gardner's application based on Haberman's statutory disqualification stemming from his 1992 felony conviction for money laundering. We base our findings on an independent review of the record. II. From April 1984 until August 1992, Haberman worked as a registered representative for various member firms. During much of that time, he was also employed as a licensed insurance agent at two firms. In late 1990 and early 1991, Haberman was operating a financial planning business as a branch office of a broker-dealer when he invested in mutual funds on behalf of Brian Hirt, a college acquaintance with a history of felony convictions for narcotics trafficking. Unaware that Hirt was working as a government informant, Haberman illegally accepted funds that Hirt represented were proceeds of unlawful activity. [1] Over the course of three meetings, Haberman accepted a total of $45,000 in cash and cashier's checks to purchase mutual funds for Hirt, and evaded federal financial reporting requirements. On December 29, 1992, Haberman pleaded guilty in the United States District Court for the District of Minnesota to one count of money laundering. [2] He was sentenced to a 41-month prison term, fined $7500, and ordered to complete two years of supervised release subsequent to the prison term. He was placed in Duluth Federal Prison Camp from March 15, 1993, to September 6, 1995; a halfway house from September 6 to November 1, 1995; and home confinement from November 1, 1995, to March 5, 1996. His supervised release lasted from March 5, 1996, to November 25, 1997. Upon his conviction, Haberman was subject to a statutory disqualification under the Securities Exchange Act of 1934 ("Exchange Act") and the NASD By-Laws. [3] As a statutorily disqualified individual, he was no longer eligible to associate with an NASD member firm absent the consent of the NASD. [4] Since the disqualifying event, Haberman has had his insurance license reinstated and has worked as an independent insurance agent (September 1996 to May 1997). The NASD noted, without further discussion, that Haberman was associated in a non-registered capacity with two NASD member firms (December 1996 to present). According to Haberman, no complaint in the securities or insurance industries has ever been lodged against him by a client. In mid-1997, Gardner applied to the NASD for consent to become associated with Haberman. Gardner has been an NASD member since 1988. The firm sells mutual funds, variable life insurance products, and, to a lesser extent, stocks and bonds. It does not sell options or permit discretionary accounts. The firm does not accept cash payments and requires all checks to be payable to Gardner or its clearing broker. At the time of application to the NASD, Gardner had nine registered principals and thirty-four registered representatives. The representatives are located primarily in single-person offices in several states. Larry O. Bumgardner is the president and sole compliance officer of the firm. Bumgardner works in the home office with one other registered representative. As part of his compliance duties, Bumgardner makes annual or more frequent visits to the offices of the associated representatives. The record indicates that Gardner's representatives conduct many client meetings outside of the firm's offices. On December 7, 1997, the NASD's Statutory Disqualification Committee held a hearing on Gardner's application for association with Haberman. Both Haberman and Bumgardner appeared at the hearing. The NASD concluded that the application for association was not in the public interest because Haberman had committed an offense that was serious and securities-related and that occurred while Haberman was operating his own office of an NASD member firm. The NASD also found Gardner's proposed supervision of Haberman inadequate. This appeal followed. **FOOTNOTES** [1]: Haberman admitted this during the NASD proceedings: Haberman: I knew the source. I'm guilty of knowing the source of that money that [Hirt] invested with me was dirty money. Panel member: How did you know that? Haberman: Because he told me. [2]:Haberman was convicted for failure to report financial transactions and accepting funds represented to be proceeds of unlawful activity, under the following statutes and regulations: 18 U.S.C. 1956(a)(3)(B); 18 U.S.C. 1956(a)(3)(C); 31 U.S.C. 5313(a); 31 C.F.R. 103.11; and 31 C.F.R. 103.22. [3]:See Section 3(a)(39)(F) of the Exchange Act, 15 U.S.C. 78c(a)(39)(F); Article II, Section 4(f)(2) of the NASD By- Laws, NASD Manual (CCH), pp. 1102-03 (Sept. 1991). [4]:See Article II, Section 3(b) of the NASD By-Laws, NASD Manual (CCH), p. 1101-02 (Sept. 1991); Section 15A(g)(2) of the Exchange Act, 15 U.S.C. 78o-3(g)(2). III. A. Section 19(f) of the Exchange Act governs this appeal. [5] Under Section 19(f), we will uphold the NASD's denial of Gardner's application for association with Haberman if we find that the specific grounds on which such denial is based "exist in fact," that such denial is in accordance with NASD rules, and that such NASD rules are, and were applied in a manner, consistent with the purposes of the Exchange Act, unless we find that the NASD's denial "imposed any burden on competition not necessary or appropriate in furtherance of the purposes" of the Exchange Act. [6] B. Haberman does not dispute that he is subject to a statutory disqualification based on his 1992 felony conviction. [7] He claims instead that the NASD was incorrect in finding that his conviction for money laundering was either serious or securities- related. [8] Haberman admits that the criminal sanctions imposed were substantial and that the investment transactions occurred as described by the NASD. However, he argues that, in determining the seriousness of the violation, the NASD should have recognized that the sanctions imposed on Haberman were intended by the judge as much to deter the financial community as to punish Haberman. [9] Haberman further suggests without explanation that his conviction for money laundering is unrelated to the conduct of a securities professional. We believe that the sentence imposed on Haberman, whether intended as punishment or deterrence, may properly indicate the seriousness of Haberman's offense. Furthermore, regardless of the criminal sanctions imposed, we repeatedly have found that convictions for money laundering and other felonies related to fraud and drug trafficking can warrant disqualification from the securities industry. [10] We also have found that a conviction for failure to file a report with respect to a transaction involving the purchase of securities is securities-related. In Weisser, the president and owner of a small municipal securities broker-dealer failed to file the required reports after engaging in numerous transactions in which he received cash from a client to be invested in bonds. [11] Weisser pled guilty to one count of failure to file a currency transaction report. [12] This Commission found that Weisser's conviction arose out of his conduct as a broker-dealer. [13] In the present case, Haberman was convicted for failure to report a financial transaction during the operation of a branch office of a broker-dealer and for using funds that he believed were "dirty money" to effect securities transactions. Accordingly, the NASD properly determined that the violation was serious and securities-related. [14] Haberman also contends that, because the transaction was in accord with his client's instructions, there "was simply no basis upon which the NASD can claim that its decision is consistent with the Exchange Act's purpose of protecting investors." We disagree. To protect investors and maintain investor confidence in the markets, securities professionals are obliged to maintain high standards of business ethics. [15] Haberman's criminal conduct was a serious breach of this obligation. In addition, Haberman incorrectly assumes that the sole purpose of the Exchange Act is to protect investors. The purposes of the Exchange Act are broad [16] and encompass far more than the protection of investors. [17] The purposes include, for instance, "protect[ing] . . . the Federal taxing power," [18] "insur[ing] the maintenance of fair and honest markets in [securities] transactions," [19] and upholding the integrity of the securities industry. [20] We find that the NASD decision is consistent with the above purposes. Haberman also argues that the application for association should be approved due to the time elapsed since his conviction. However, he was convicted for money laundering only six years ago. [21] We conclude that Haberman's recent felony conviction, which resulted from conduct undertaken in his capacity as an associated person of a broker-dealer, supports the NASD's determination that his association with Gardner at this time is not in the public interest. [22] C. Haberman advances several complaints about the NASD hearing. He claims that he was deprived of due process because the hearing was brief, and because there were what he describes as "pauses" in the proceedings. He further alleges that the hearing panel was not familiar with Gardner's submissions and failed to make relevant inquiries. The hearing's brevity, however, is attributable in substantial part to Haberman and Bumgardner. The panel afforded both Haberman and Bumgardner opportunities to elaborate on Gardner's application. Instead, Haberman and Bumgardner waived opening and closing arguments, and offered simply to answer any questions posed by the panel. The panel members demonstrated their familiarity with the record. The panel, in its opening statement, expressly stated that the panel members had reviewed the application and other pertinent documents. During the hearing, the panel members asked numerous questions reflecting their knowledge about details of the record. For example, Haberman complains that the panel ignored a recommendation letter from the District Court Judge who sentenced him. However, the panel chairman remarked on that letter during the hearing. Contrary to Haberman's contentions, moreover, the panel evidenced awareness of Haberman's insurance license reinstatement and the willingness of Gardner's insurance carrier to issue a bond covering Haberman. D. Haberman challenges the NASD's conclusion that Gardner's proposed supervision of Haberman is inadequate. Haberman notes that Bumgardner will monitor his correspondence, which will be on letterhead with Gardner's telephone number, and that Haberman's clients will be directed to forward questions or complaints to Gardner. Haberman claims that restrictions on his clients' methods of payment, as well as his location in the home office and his daily conversations and weekly meetings with Bumgardner, constitute adequate supervision. We require, however, stringent supervision for a person subject to a statutory disqualification. [23] Bumgardner is the sole compliance officer for the firm. In addition to his administrative responsibilities as president of Gardner, Bumgardner supervises thirty or more representatives located primarily in one-person offices in several states. Furthermore, Gardner's business seems to focus on visits to clients outside of the firm's offices, and Gardner has offered no indication that Haberman would conduct his business differently. The NASD properly found it likely that Bumgardner and Haberman would have insufficient contact with each other. Despite Gardner's precautions, we find that the proposed supervision lacks the intensive scrutiny required for a person subject to a statutory disqualification. Haberman further argues that a finding of inadequate supervision at Gardner suggests a bias against small firms and a burden on competition. Haberman has offered no evidence in support of this allegation. In any case, we find that the NASD's determination of the inadequacy of Gardner's proposal to supervise a statutorily disqualified individual does not create a burden on competition. [24] In light of the foregoing considerations, we dismiss this appeal. An appropriate order will issue. [25] By the Commission (Chairman LEVITT and Commissioners JOHNSON, HUNT, CAREY and UNGER). Jonathan G. Katz Secretary **FOOTNOTES** [5]: Section 19(f) of the Exchange Act, 15 U.S.C. 78s(f). [6]:Id. See, e.g., Boleslaw Wolny, Exchange Act Rel. No. 40013 (May 20, 1998), 67 SEC Docket 553, 557; Jan Biesiadecki, Exchange Act Rel. No. 39113 (Sept. 22, 1997), 65 SEC Docket 1321, 1323-24; M.J. Coen, 47 S.E.C. 558, 563 (1981). [7]:Haberman suggests that the NASD By-Laws require the NASD to permit a statutorily disqualified individual to associate with a member firm if such association would be in the public interest. The NASD By-Laws prohibit a member firm from becoming associated with a person who is subject to a statutory disqualification. Article II, Section 3(b) of the NASD By-Laws, NASD Manual (CCH), p. 1043 (July 1997). The NASD may, in its discretion, approve association with a statutorily disqualified person only if the NASD determines that such approval is consistent with the public interest and the protection of investors. Article II, Section 3(d) of the NASD By-Laws, NASD Manual (CCH), p. 1043 (July 1997). As discussed, we have concluded that Haberman's association under the circumstances presented here is not in the public interest. [8]:To determine whether the NASD properly determined the public interest, Haberman has suggested that we analyze factors announced by this Commission in Exchange Act Rel. No. 11267 (Feb. 26, 1975) (the "1975 Release"), which established guidelines for consideration by this Commission of an application by a barred individual to re-enter the securities industry consistent with the public interest. The 1975 Release, however, was superseded in 1984 by our adoption of former Rule of Practice 29 (now Rule 193, 17 C.F.R. 201.193). In the accompanying release, we made clear that, if "an individual is 'subject to a statutory disqualification', he or she must seek the consent of the SRO before associating with a member of that SRO." Exchange Act Rel. No. 20783 (Mar. 22, 1984), 49 Fed. Reg. 12204 (Mar. 29, 1984). We further stated that, even if a disqualified individual sought relief initially from this Commission, our "approval of an application for consent to associate . . . with a registered entity should not be construed to be consent by an SRO for the individual to associate with one of its members. That consent must be given by the particular SRO." Id. As discussed above, our review of the SRO's determination not to permit such association is governed by Section 19(f) of the Exchange Act. [9]:In support of his claim that the violation was not serious, Haberman cites a letter from the District Court Judge who sentenced him. In the letter, the judge explains to this Commission that the "strong" sentence he imposed was intended in part to deter other members of the financial industry. The judge also states his view that Haberman is not a threat to investors. We have considered this letter in our determination, and, for the reasons discussed below, have nonetheless determined to dismiss this appeal. [10]:See, e.g., Wolny, 67 SEC Docket at 557 (failure to report a transaction); Michael A. Weisser, Exchange Act Rel. No. 36216 (Sept. 11, 1995), 60 SEC Docket 606, 609 (same); Halpert and Company, Inc., 50 S.E.C. 420, 422 (1990) (credit card fraud); Louis A. Frangos, 49 S.E.C. 865, 866 (1988) (theft and knowingly passing a bad check); Liberty Brokerage, Inc., 51 S.E.C. 288, 290 (1993) (drug sales to co-workers). [11]:60 SEC Docket at 607. [12]:Id. [13]:Id. at 609 & n.9. [14]:Congress indicated that it considered all felonies to be serious when it amended the Exchange Act in 1990 to expand the scope of statutory disqualification to include convictions for "any other felony." Act of November 15, 1990, Pub. L. No. 101-550, Title II, 203(b)(6), 104 Stat. 2713, 2717-18 (codified at Section 3(a)(39)(F) of the Exchange Act, 15 U.S.C. 78c(a)(39)(F)). Congress directed that this Commission and each self-regulatory organization should "provide special scrutiny of persons who have been convicted of crimes . . . such as taking of property, assault, murder, and drug trafficking." H.R. Rep. No. 101- 240, at 40 (1989). Haberman appears to claim that the Exchange Act violates the Constitution when it states that a person is subject to a statutory disqualification upon conviction for "any" felony. He relies on Smith v. Fussenich, 440 F.Supp. 1077 (D. Conn. 1977), in which the court held that a statutory or regulatory denial of consideration for employment may be unconstitutionally broad when such denial is based on "any" felony conviction, as opposed to being based on a conviction for a felony that is relevant to the employment sought. As this Commission has noted in the past, we have no power to invalidate the very statutes that Congress has directed us to enforce. See, e.g., Milton J. Wallace, 45 S.E.C. 694, 697 (1975); Walston & Co., 5 S.E.C. 112, 113 (1939). In any event, as discussed above, Haberman's felony was not just "any" felony, but was committed in the course of his association with a broker-dealer and is securities-related, and thus reflects on his fitness to engage again in the securities profession. [15]:See Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 315 (1985) ("[T]he primary objective of the federal securities laws [is the] protection of the investing public and the national economy through the promotion of 'a high standard of business ethics . . . in every facet of the securities industry.'") (ellipses in original) (quoting SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 186-87 (1963)). [16]:The Exchange Act has "broad remedial purposes." MacLean v. Huddleston, 459 U.S. 375, 386 (1983) (recalling that "[i]n enacting the 1934 Act, Congress stated that its purpose was 'to impose requirements necessary to make [securities] regulation and control reasonably complete and effective.'") (second brackets in original) (citing Section 2 of the Exchange Act, 15 U.S.C. 78b). [17]:Cf. United States v. Naftalin, 441 U.S. 768, 775 (1979) ("[N]either this Court nor Congress has ever suggested that investor protection was the sole purpose of the Securities Act.") (internal punctuation and citation omitted). [18]:Section 2 of the Exchange Act, 15 U.S.C. 78b. Money laundering undermines the federal taxing power. See, e.g., United States v. Schmidt, 99 F.3d 315, 316 (9th Cir. 1996) ("Schmidt, acting as a financial institution, converted cash into cashier's checks and failed to report transactions involving substantial sums of money. This practice allowed his clients to evade the notice of the Internal Revenue Service."). [19]:Section 2 of the Exchange Act, 15 U.S.C. 78b. [20]:The integrity of the securities market is a broad concept. See, e.g., United States v. Haddy, 134 F.3d 542, 544 (3d Cir. 1998) (stating that the Exchange Act's "objective of maintaining the integrity of the stock market forbids deceitful practices" regardless of whether there are identifiable victims); Blount v. SEC, 61 F.3d 938, 947 (D.C. Cir. 1995) (citing the Exchange Act's purpose of "protecting the integrity of the market" when upholding a regulation restricting unethical political contributions by securities professionals), cert. denied, 517 U.S. 1119 (1996). [21]:See JJFN Services, Inc., Exchange Act Rel. No. 39343 (Nov. 21, 1997), 65 SEC Docket 2806, 2809-10 n.6 (finding that a felony conviction entered five years earlier and parole which ended three years earlier were "relatively recent" and not "remote in time"); Frangos, 49 S.E.C. at 867 (noting that a felony conviction entered five years earlier was a "recent conviction"). [22]:As we have previously observed, "Congress has granted the NASD broad discretion in matters involving the employment of statutorily disqualified individuals." Dennis Milewitz, Exchange Act Rel. No. 40254 (July 23, 1998), __ SEC Docket __, __; Halpert, 50 S.E.C. at 422 ("Particularly in matters involving a firm's employment of persons subject to a statutory disqualification, it is appropriate to recognize the NASD's evaluation of appropriate business standards for its members."). [23]:See Coen, 47 S.E.C. at 562-563; Frangos, 49 S.E.C. at 867. [24]:As necessary or appropriate in furtherance of the purposes of the Exchange Act, we may require stringent supervision of any statutorily disqualified individual, regardless of the size or structure of the supervising firm, whether or not such a requirement placed a burden on competition. See Section 19(f) of the Exchange Act; Exchange Services, Inc. v. SEC, 797 F.2d 188, 191 (4th Cir. 1986) ("The SEC can affirm the NASD, despite the disadvantage to competition, if the decision is necessary or appropriate in furtherance of the purposes of the Act."). Cf. Associated Securities Corp. v. SEC, 283 F.2d 773, 775 (10th Cir. 1960) ("In the balancing of injury to the individual by exclusion from the security business and of harm to the public by proscribed activities in security transactions the necessity of protection to the public interest far outweighs any personal detriment resulting from the impact of the applicable laws."). [25]: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. UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. 40673 / November 12, 1998 Admin. Proc. File No. 3-9554 ___________________________________________________ : In the Matter of the Application of : : WILLIAM J. HABERMAN : c/o Michael A. Hatch, Esq. : Hatch, Eiden & Pihlstrom : 120 South Sixth Street -- Suite 850 : Minneapolis, Minnesota 55402 : : For Review of Denial of a Member's : Continuance Application by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : ___________________________________________________: ORDER DISMISSING APPEAL OF DENIAL OF MEMBER'S APPLICATION TO REGISTERED SECURITIES ASSOCIATION FOR SALES REPRESENTATIVE'S ASSOCIATION WITH MEMBER On the basis of the Commission's opinion issued this day, it is ORDERED that the appeal taken by William J. Haberman from the denial by the National Association of Securities Dealers, Inc. of the application filed by Gardner Financial Services, Inc. to continue as a member if it associates with William J. Haberman be, and it hereby is, dismissed. By the Commission. Jonathan G. Katz Secretary