SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Admin. Proc. File No. 3-10076
In the Matter of the Application of
JOSEPH S. BARBERA
For Review of Disciplinary Action Taken by the
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
OPINION OF THE COMMISSION
REGISTERED SECURITIES ASSOCIATION -- REVIEW OF DISCIPLINARY PROCEEDING
Violations of Conduct Rule
Failure to Comply with Net Capital Requirement
Failure to Maintain an Accurate General Ledger
Failure to Evidence Creation of Trial Balances
Member firm of registered securities association, acting through its FINOP, violated net capital requirement, failed to maintain an accurate general ledger, and failed to evidence creation of trial balances. Held, association's findings of conduct rule violations and imposition of sanctions are sustained.
Marc S. Gottlieb, of Beckman, Millman & Sanders, LLP., for Joseph S. Barbera.
Alden S. Adkins, Norman Sue, Jr., Susan L. Beesley, and Alan B. Lawhead, for NASD Regulation, Inc.
Appeal filed: October 13, 1999
Joseph S. Barbera ("Barbera"), formerly the limited principal -- financial and operations ("FINOP"), chief financial officer, and a registered general securities principal at KBC Securities, Inc. ("KBC"), a member of the National Association of Securities Dealers, Inc. ("NASD"), appeals from NASD disciplinary action. The NASD found that Barbera was responsible for KBC's conducting, on three occasions, a securities business while it failed to maintain the minimum net capital required by Rule 15c3-1 under the Securities Exchange Act of 1934.1 The NASD also found that Barbera was responsible for KBC's failure to maintain an accurate general ledger and to evidence creation of trial balances, as required by Exchange Act Rules 17a-3 and 17a-4.2 The NASD concluded that Barbera thereby violated NASD Conduct Rule 2110.3 The NASD censured Barbera, fined him $2,000, and assessed costs. The NASD also ordered Barbera to requalify as a FINOP. We base our findings on an independent review of the record.
KBC became a member of the NASD in April 1996. At that time, Barbera was registered with the NASD as KBC's only FINOP and was responsible for, among other things, preparing KBC's balance sheet and general ledger, and computing the firm's net capital.4
In September 1996, the NASD conducted a three-day on-site examination of KBC at its offices located in Cincinnati, Ohio. The findings from the examination resulted in the instant disciplinary action.5
Exchange Act Rule 15c3-1 is designed to ensure liquidity in the event that a broker or dealer encounters financial difficulty.6 It requires a broker or dealer to have sufficient assets that are readily convertible to cash to cover its indebtedness to customers and other broker-dealers.7 The Commission has stated that broker-dealers must "keep their books in accordance" with generally accepted accounting principles ("GAAP") and "use the accrual method of accounting."8 Under accrual accounting, a broker-dealer "must recognize revenues when earned and liabilities when incurred."9
Pursuant to Exchange Act Rule 15c3-1, KBC had to maintain minimum net capital of $5,000 in order to conduct a securities business.10 The NASD found that KBC was below its minimum net capital requirement and conducted a securities business on July 3, August 28 and September 4, 1996. We address each date below.
A. July 3, 1996
The NASD concluded that, as of July 3, 1996, KBC had a net capital deficiency of $968.46. The NASD determined that Barbera was responsible for this deficiency by failing to include in KBC's month-end balance sheet the following accrued expenses:
Cincinnati Bell Telephone ("CBT")
SMA Computers ("SMA")
Gregory Framery ("Framery")
Bureau of Workers Compensation
At the hearing below, Barbera admitted that he failed to accrue July 1996 expenses for KBC.11 Barbera also has not challenged the NASD's determination that, as of July 3, 1996, KBC should have accrued expenses for Tele-Communications, Inc. and the Bureau of Workers Compensation.
Barbera contends, however, that the NASD's calculation of KBC's deficiency must be reduced by: 1) $450.00 because KBC did not increase its short-term loans by this amount until after July 3rd;12 2) $90.00 to reflect a cash adjustment;13 3) $804.18 to reflect an installment payment agreement with CBT; 4) $500 toreflect a credit from SMA; and 5) $207.00 to reflect a payment already made. With these adjustments, Barbera argues that KBC had excess net capital of $632.72. We address Barbera's proposed offsets below.
By invoice dated June 4, 1996, CBT requested payment in the amount of $1,206.27, on or before June 25, 1996, for services previously rendered to KBC. Barbera argues that CBT agreed to permit KBC to pay this amount in three equal monthly installments of $402.09 (with due dates on June 25, July 25, and August 25, 1996). Barbera asserts that KBC should have to accrue only the $402.09 due as of July 3rd (the overdue June 1996 payment) and that KBC's net capital deficiency calculation therefore must be reduced by $804.18.
Under GAAP, however, KBC must recognize a liability for the full amount of $1,206.27, as reflected in the CBT invoice.14 Although CBT subsequently agreed to permit payment of this liability over a three-month period, CBT's agreement does not change the fact that, under GAAP, KBC was required to recognize the liability in its full amount when it was incurred.15 The "payment agreement" between KBC and CBT makes clear that the entire amount was due. In the agreement, CBT stated that it would not interrupt KBC's service so long as the "$1,206.27 amount due" was paid in accordance with the designated payment schedule. (Emphasis added.) Accordingly, we conclude that KBC was required to accrue the entire invoice amount for its net capital calculation.
By invoice dated June 9, 1996, SMA billed KBC $691.06 for computer goods and services. Barbera, however, claims that KBC received a $500 credit from SMA and that the amount due SMA was only $191.06. Barbera notes that KBC's general ledger detail report reflects a $500 credit from SMA.
Barbera's argument that the October 1996 general ledger report demonstrates that KBC received a $500 credit from SMA is contradicted by a contemporaneous listing of KBC's checks issued for the period of June 1, 1996 through September 30, 1996. The check history report reflects three entries for the same check number payable to SMA: 1) a July 20, 1996 debit for $500; 2) a July 31, 1996 debit for $500; and 3) a July 31, 1996 credit for $500. When the check history and general ledger reports are read together, the $500 "credit" from SMA appears to reflect the fact that KBC entered the $500 payment twice in its general ledger, and then reversed the second entry to correct the error.
Based on the record we conclude that, as of July 3, 1996, KBC had an accrued expense of $691.06 payable to SMA. There is a handwritten notation on the SMA invoice that KBC made a $500 payment to SMA by check. This check, dated July 20, 1996, is listed in KBC's manual check register, and KBC's July 1996 bank statement reflects that the check was honored on July 23, 1996. Barbera does not assert that this payment was in error.
Barbera does not dispute that KBC failed to accrue the Framery invoice as of July 3, 1996. However, he argues that the invoice amount of $407.94 must be reduced by $207.00.
The Framery invoice, dated June 8, 1996, stated that KBC owed Framery $407.94. An undated handwritten notation, however, reduces the balance by $207.00, for a total amount due of $200.94. According to KBC's check register, KBC issued a check to Framery dated June 18, 1996, in the amount of $207.00 and a second check to Framery in the amount of $200.94, dated August 15, 1996. The NASD examiner testified that KBC's June 1996 general ledger failed to include an account payable to Framery of $200.94. We conclude that Barbera is entitled to an adjustment of $207.00 in the NASD's calculation of KBC's July 3, 1996 net capital deficiency.
* * * *
While we reduce KBC's net capital deficiency by $207.00, we find that KBC had a net capital deficiency of $761.46 on July 3, 1996. It is undisputed that KBC conducted a securities business on that date. As FINOP, Barbera, was expressly charged with the duty to supervise and/or perform KBC's "responsibilities under financial responsibility rules promulgated pursuant to theprovisions of the [Exchange] Act."16 Accordingly, we find that Barbera was responsible for KBC's violation, as of July 3, 1996, of the net capital rule.
B. August 28 and September 4, 1996 Deficiencies
The NASD found that KBC had a net capital deficiency of $16,522.29 on August 28, 1996 and a net capital deficiency of $18,455.29 on September 4, 1996. Barbera does not dispute these calculations of net capital deficiencies. Instead, Barbera asserts that the NASD was responsible for KBC's violations because it was "willful and/or negligent" in failing to approve a subordination loan agreement that would have provided KBC sufficient net capital.17
In spring 1996, Barbera notified the NASD that KBC needed additional capital and would seek to obtain a subordinated loan. In May 1996, KBC received from the NASD a blank "SL-1 Form" subordination loan agreement. Barbera's brother provided KBC with $10,000 "as a bridge loan that was going to be converted to the sub[ordinated] loan upon approval of the sub[ordinated] loan." On August 12, 1996, KBC obtained an additional $20,000 from two other lenders, and Barbera submitted the proposed subordination loan agreement to the NASD for its review and approval. From August 12th to September 19th, when Barbera discovered that the NASD had "issues" with the proposed subordination loan agreement, Barbera testified that he "wasn't really in the loop." In mid-September, the NASD stated that KBC needed to submit an "SL-5 Form."18
Barbera claims that the NASD improperly delayed approval of the subordinated loan.19 Because he applied for a subordinatedloan using the SL-1 Form that the NASD supplied, Barbera asserts that the NASD erred in requiring KBC subsequently to file an SL-5 Form.20 Barbera also complains that the NASD did not act promptly on KBC's application even though KBC had ample cash in its bank account (i.e., the funds from Barbera's brother and two others) to fund the subordinated loan.
Under Exchange Act Rule 15c3-1d(c)(6)(i), "[n]o proposed agreement shall be a satisfactory subordination agreement for the purposes of this section unless and until the [NASD] has found the agreement acceptable and such agreement has become effective in the form found acceptable."21 The fact that KBC had $30,000 in the bank did not resolve KBC's net capital deficiency until the lenders' claims to the money were subordinated to the rights of the firm's customers and general creditors. Barbera admits that the loan agreement submitted for approval in August 1996 was incomplete.22 However, as Barbera concedes, he "wasn't in the loop," for a five-week period during which the subordinated loanapplication was pending and both of the net capital rule violations at issue occurred. Accordingly, we find that KBC violated the net capital rule on August 28 and September 4, 1996, and that Barbera, as FINOP, was responsible these violations.
A. Failure to Maintain Accurate General Ledger
Under Exchange Act Rule 17a-3(a)(2), KBC is required to make and keep current "[l]edgers (or other records) reflecting all assets and liabilities, income and expense and capital accounts."23 As FINOP, Barbera had responsibility to maintain accurately KBC's books and records, including its general ledger, in compliance with Exchange Act Rules 17a-3 and 17a-4.24
KBC failed to maintain an accurate general ledger for April, June, and July 1996. Before the NASD, Barbera admitted that "certain expenses and checks were not booked." An NASD staff examiner testified that Barbera failed to record in KBC's April 1996 general ledger two checks payable to KBC's president.25 In June and July 1996, Barbera failed to accrue expenses for certain accounts payable.26 These checks and accruals were not recorded until after Barbera prepared a corrected general ledger in October 1996 following the NASD examination. Moreover, Barbera's own witness, a former NASD examiner whom Barbera soughtto qualify as an expert witness at the hearing, testified that the April through July 1996 KBC general ledgers provided to him for review by Barbera "were not accurate."
Barbera claims that KBC's president "failed to provide Barbera with all of the firm's bills or with copies of all of the checks written on the firm's account." Barbera concludes that the NASD "teamed up" with KBC's president "in an attempt to lay all the blame (charges) on Barbera."
Barbera cannot shift responsibility to KBC's president.27 Barbera undertook the obligation to act as KBC's FINOP knowing that he would maintain an office in New York while KBC's office was in Cincinnati. Although Barbera complains that KBC's president both had firm invoices sent to the president's personal address and wrote checks to himself from KBC's account, KBC's checks and bank statements designated the president's home address as KBC's business address. At a minimum, Barbera knew or should have known that financial records, including invoices, were being sent to KBC in care of the president's home address.
Although Barbera now seeks to impeach the president's statements before the NASD, Barbera called KBC's president as a witness at the hearing. In response to Barbera's questioning, the president testified that KBC, at Barbera's request, would provide Barbera with the amount of a particular bill, or, if Barbera directed, an actual copy of the bill.
Based upon the foregoing, we find that KBC failed to maintain an accurate general ledger for April, June, and July 1996, as required by Exchange Act Rule 17a-3, and that Barbera, as FINOP, was responsible for this failure.
B. Failure to Evidence Creation of Trial Balances
Under Exchange Act Rule 17a-3(a)(11), KBC is required to make and keep current "a record of the proof of money balances of all ledger accounts in the form of trial balances. . . ."28 Further, Exchange Act Rule 17a-4(b)(5) requires KBC to preserve, for not less than three years, all trial balances.29
During KBC's on-site examination, NASD examiners requested copies of KBC's May through July 1996 trial balances. The examiners found no trial balances and testified that Barbera informed them that he had not created trial balances for those months. The NASD credited the testimony of multiple NASD witnesses establishing that Barbera admitted he did not create trial balances.30
Barbera argues that the testimony of NASD staff witnesses attributing statements to Barbera that he did not create trial balances is hearsay, and that any reliance on such testimony is error. We have repeatedly recognized, however, that hearsay is admissible in NASD proceedings.31
Although he challenges the examiners' testimony, Barbera also argues that the "requisite information" for preparing a trial balance was available to the NASD staff.32 He asserts that the Exchange Act rules require only that a firm maintain ledgers or other records "which reflect the firm's financialinformation sufficient to permit a trial balance to be prepared" and that the Exchange Act "is silent on what constitutes a 'trial balance' for purposes of compliance" with the rules.33
However, Exchange Act Rule 17a-3(a)(11) expressly provides the requirements for the creation of "trial balances."34 A principal purpose of the requirement for a trial balance is "to assist in keeping members, brokers and dealers currently informed of their capital positions."35 Although Barbera claims that the information contained in a trial balance can be easilyabstracted from KBC's general ledger and other records, the rules require that trial balances be created monthly and maintained.36
Based upon the foregoing, we find that KBC failed to create trial balances for April, May, June, and July 1996, as required by Exchange Act Rules 17a-3 and 17a-4, and that Barbara, as FINOP, was responsible this failure.
A. Document Discovery Request and Due Process
Barbera argues that NASD Code of Procedure Rule 9251 required the NASD to provide him access to a copy of its KBC subordination loan agreement file, which he asserts might contain "exculpatory evidence."37 Barbera concludes that without this information "there was no way for Barbera to adequately defend himself against the net capital violations."
Although Procedure Rule 9251 did not apply to Barbera's proceeding, the NASD nonetheless offered to make available to Barbera for inspection all relevant, non-privileged documents in the NASD's examination file.38 Although Barbera concedes that he had the ability to inspect the documents before the hearing, he failed to do so. Instead, Barbera asked for production of the file on the day of the hearing.
As discussed above, the record demonstrates that Barbera tendered an improperly documented and incomplete subordinated loan agreement to the NASD and stayed "out of the loop" for a five-week period following his submission. Barbera has made only vague assertions as to why the file was exculpatory. We find no prejudice to Barbera by the NASD's refusal to produce a file on the day of the hearing when Barbera failed to inspect documents before the hearing.
B. Exclusion of Settlement Terms
Barbera complains that he was denied the opportunity to question KBC's president, who was his witness at the hearing, about the terms of a then-pending settlement between KBC and the NASD. It is immaterial to Barbera's liability whether KBC's president was or was not also culpable in KBC's violations.39 The terms upon which KBC or its president settled an NASD disciplinary action arising from these facts are also immaterial to Barbera's liability. We have "previously recognized that the NASD may properly offer or impose lesser sanctions on respondents who settle based on pragmatic considerations such as the avoidance of time and manpower that would be consumed in prosecuting an adversary proceeding."40 Accordingly, Barbera was not prejudiced by the exclusion of questions related to the then-pending settlement.
While characterizing the monetary sanctions as "justifiably modest," Barbera claims that it is "harsh" and "extreme" to require him to requalify as a FINOP. Barbera states that he recognized KBC's net capital problems and sought to remedy them. He blames the NASD for failing to process KBC's subordinated loan application and to assist KBC in resolving its net capital problems. Barbera asserts that the general public was never at risk and stresses that he has no other disciplinary record.
Exchange Act Section 19(e)(2) provides that the Commission may "cancel, reduce, or require the remission of" Barbera's sanction if we find that the sanction "imposes any burden on competition not necessary or appropriate in furtherance of [the Exchange Act] or is excessive or oppressive."41 The rules that Barbera allowed KBC to violate are fundamental financial and operational requirements. An important part of a FINOP's role is to ensure compliance with such rules.42 The sanctions imposed against Barbera are consistent with, and at the low end of, the recommended range of the NASD's Sanctions Guidelines.43 The record demonstrates that Barbera misapprehends his obligations as a FINOP, as evidenced, for example, by his insistence that our rules do not require the creation and maintenance of trial balances. Under these circumstances, the requirement that Barbera requalify as a FINOP is particularly appropriate.44
We conclude that the sanctions imposed by the NASD against Barbera are not excessive or oppressive and do not impose any unnecessary burden on competition.
An appropriate order will issue.45
By the Commission (Chairman LEVITT and Commissioners HUNT, CAREY, and UNGER).
Jonathan G. Katz
UNITED STATES OF AMERICA
SECURITIES EXCHANGE ACT OF 1934
Admin. Proc. File No. 3-10076
In the Matter of the Application of
JOSEPH S. BARBERA
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 by the National Association of Securities Dealers, Inc. ("NASD") against Joseph S. Barbera, and the NASD's assessment of costs be, and they hereby are, sustained.
By the Commission.
Jonathan G. Katz
17 C.F.R. § 240.15c3-1.
17 C.F.R. §§ 240.17a-3 and 240.17a-4, respectively.
NASD Conduct Rule 2110 provides that a "member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade."
See NASD Membership and Registration Rule 1022(b)(a FINOP's duties include final approval and responsibility for the preparation and accuracy of financial reports, final preparation of such reports, and supervision and/or performance of the member's responsibilities under all Exchange Act financial responsibility rules).
Initially, the NASD brought disciplinary action against both KBC and Barbera. KBC entered into a settlement and theaction proceeded solely against Barbera.
See, e.g., James S. Pritula, Securities Exchange Act Rel. No. 40647 (Nov. 9, 1998), 68 SEC Docket 1434, 1437 (citing Kirk L. Ferguson, 51 S.E.C. 1247, 1249 (1994); Lowell H. Listrom, 50 S.E.C. 883, 886 (1992), aff'd, 975 F.2d 866 (8th Cir. 1992)(Table)).
See, e.g., William H. Gerhauser, Exchange Act Rel. No. 40639 (Nov. 4, 1998), 68 SEC Docket 1289, 1293 (citing Livada Sec. Co., 45 S.E.C. 598, 600 (1974)).
James S. Pritula, Exchange Act Rel. No. 40647 (Nov. 9, 1998), 68 SEC Docket 1434, 1440.
Id. (citing Clinger & Co., Exchange Act Rel. No. 39390 (Dec. 3, 1997), 65 SEC Docket 3060, 3063 n.7; Exchange Act Rel. No. 18737 (May 13, 1982), 25 SEC Docket 468, 468 n.4).
17 C.F.R. § 240.15c3-1(a)(2)(vi). While Exchange Act Rule 15c3-1 provides for the minimum net capital requirement, the Exchange Act itself proscribes the conduct of a securities business while a broker or dealer is in contravention of any Commission-prescribed financial responsibility requirement rules or regulations. 15 U.S.C. § 78o(c)(3).
Barbera stated that he "didn't know there were accruals that had to be booked. Once we found out about them, they were tested and I took the appropriate actions."
The NASD previously made Barbera's requested $450.00 adjustment in its opinion. Moreover, Barbera's own calculation demonstrates that KBC received the benefit of the $450.00 adjustment:
Applying Barbera's proposed $1,601.18 in adjustments against KBC's net capital deficiency of $968.46 results in excess net capital of $632.72, the amount that Barbera now claims is correct.
Barbera asserts that KBC's cash balance must be adjusted by $90.00 because a KBC check in that amount was dishonored by KBC's bank for insufficient funds. However, KBC's July 1996 bank statement states that the bank honored this check on July 2, 1996. We therefore reject Barbera's assertion.
See Statement of Financial Accounting Concepts, Concept Statement No. 6, § 35 (Financial Accounting Standards Bd. 1985) (liability is present obligation to transfer assets or provide services as a result of past transactions or events); Accounting for Contingencies, Statement of Financial Accounting Standards No. 5, § 2 (Financial Accounting Standards Bd. 1975) (amounts owed for utility services are not contingencies as there is nothing uncertain about the fact that those obligations have been incurred); Restatement and Revision of Accounting Research Bulletins, Accounting Research Bulletin No. 43, Ch. 3, § 7 (American Institute of Certified Public Accountants 1953) (current liabilities include obligations whose regular and ordinary liquidation is expected to occur within a relatively short period of time).
See supra note 14. See generally, Frank C. Minter, Handbook of Accounting and Auditing, § C1.04 (2000 ed.).
NASD Membership and Registration Rule 1022(b)(2)(E). See, e.g., James S. Pritula, Exchange Act Rel. No. 40647 (Nov. 9, 1998), 68 SEC Docket 1434, 1439 n.13 ("As FINOP, Pritula was responsible for ensuring net capital compliance.") (citing James Michael Brown, 50 S.E.C. 1322, 1326 (1992), aff'd 21 F.3d 1124 (11th Cir. 1994)(Table)).
Appendix D to Exchange Act Rule 15c3-1 sets forth the terms and conditions for the use of subordinated loans. 17 C.F.R. § 240.15c3-1d.
An SL-1 Form provides for a subordinated loan to be treated as debt and therefore included in the ratio of the borrower's debt to its debt-equity total. An SL-5 Form is used for a subordinated loan that is to be treated as equity capital. See 17 C.F.R. § 240.15c3-1(d).
Barbera further argues that language in both forms states that the NASD will approve or disapprove a subordinated loanapplication within 30 days. Neither the SL-1 Form nor the SL-5 Form expressly provides that a loan will be approved or disapproved within 30 days. Rather, both forms state that all agreements must be filed at least 30 days prior to the proposed effective date "to provide sufficient time for approval" and that exceptions to this 30-day period should be limited to "firms needing immediate approval." This language suggests that, absent unusual circumstances, a subordinated loan submitted on August 12 would not be approved before September.
Barbera's assertion that the NASD provided KBC with the wrong loan form "at a critical time" is contradicted by the fact that Barbera did not submit KBC's proposed subordination loan agreement until nearly three months after KBC received the form. As FINOP, Barbera had the obligation to determine whether the proposed transaction would be treated as a contribution to equity or a loan and to obtain the correct subordinated loan form. Barbera cannot shift KBC's failure to comply with its net capital requirement to the NASD. See, e.g., William F. Cantrell, 52 S.E.C. 1322, 1326 n.14 (1997) (a FINOP "cannot shift his responsibility for compliance with applicable requirements to a regulatory authority")(citing W.N. Whelan & Co., 50 S.E.C. 282, 284 (1990); Melvin Y. Zucker, 46 S.E.C. 731, 733 (1976)).
17 C.F.R. §15c3-1d(c)(6)(i).
Barbera stated at the hearing that, in addition to a few typos, he "recall[ed] that there was a paragraph missing," as well as "a couple of sentences," from the loan agreement he submitted.
17 C.F.R. § 240.17a-3(a)(2).
NASD Conduct Rule 1022(b).
In his Reply Brief to us, Barbera argues the "documentary evidence supports the conclusion that these checks were booked by Barbera." However, before the NASD hearing panel, Barbera makes the following admission about those checks:
And these checks were not on the books in April, correct?
Okay. For the record, I don't dispute that. We should define when they were put on. Now, this is a $400 check that Mr. Brooks cut and a $500 check that Mr. Brooks cut to himself during this time frame, $900, both to Mr. Brooks?
Correct? Do you agree with that?
For a detailed listing of KBC's unaccrued July 1996 expenses, see Section III.A. supra.
See, e.g., Gilad J. Gevaryahu, 51 S.E.C. 710, 712-13 (1993) (FINOP cannot simply accept word of firm's president in calculating net capital for firm); George Lockwood Freeland, 51 S.E.C. 389, 392-93 (1993) (where owner of firm withheld information, FINOP cannot shift responsibility for net capital rule compliance to him).
17 C.F.R. § 240.17a-3(a)(11).
17 C.F.R. § 240.17a-4(b)(5).
Unless the record contains substantial evidence to the contrary, "we have repeatedly held that the credibility determinations of an initial fact-finder are entitled to considerable weight and deference." Rafael Pinchas, Exchange Act Rel. No. 41816 (Sept. 1, 1999), 70 SEC Docket 1516, 1528 (citing Litwin Sec., Inc., 52 S.E.C. 1339, 1342, n.13 (1997)). See also Jonathan Garrett Ornstein, 51 S.E.C. 135, 137 (1992) (stressing that deference is given to initial decision maker's credibility determination based on "hearing the witnesses' testimony and observing their demeanor").
See, e.g., William H. Gerhauser, Exchange Act Rel. No. 40639 (Nov. 4, 1998), 68 SEC Docket 1289, 1302 ("Moreover, hearsay evidence is admissible in administrative proceedings."). Additionally, the NASD's procedural rules provide that formal rules of evidence are inapplicable to this proceeding. See NASD Code of Procedure Rule 9145(a), NASD Manual (1999) ("formal rules of evidence shall not apply"); former NASD Code of Procedure Rule 9224(c), NASD Manual (1996) (same). Even if the Federal Rules of Evidence applied, however, Barbera's admission is, by definition, not hearsay. See Fed. R. Evid. 801(d)(2) (an admission of a party-opponent is not hearsay).
Barbera also asserts that trial balances were created and provided to the NASD but that the NASD lost them. Barbera's "lost document" argument is contradicted by both his admission that he did not create trial balances and the testimony of multiple witnesses at the hearing that all documents taken by the NASD to be photocopied were returned.
Barbera cites to "NASD Board of Governors" Memoranda 8259 and 8260. The NASD asks that we disregard this argument because, according to the NASD, there are no NASD Board of Governors Memoranda and Barbera must therefore be citing to non-existent or non-public materials. We have determined that Barbera is citing to a single memorandum published in the NASD Manual (1996) at pp. 8258 and 8259. In addition to misquoting paragraph 2 of this memorandum, upon which Barbera heavily relies, Barbera fails to reference decisive paragraph 11 which requires: . . . the preparation of a record of the proof of money balances in all ledger accounts in the form of trial balances currently at least once a month. . . . Such trial balances and computations will serve as a check upon the current status and accuracy of the ledger accounts which members are required to maintain and keep current and will also help to keep members currently informed of their capital positions.
Subject to exemptions not applicable in this case, this Rule provides in relevant part: . . .[E]very broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934, as amended. . .shall make and keep current the following books and records relating to his business. . .(11) A record of the proof of money balances of all ledger accounts in the form of trial balances, and a record of the computation of the aggregate indebtedness and net capital, as of the trial balance date, pursuant to Rule 15c3-1. . . . Such trial balances and computations shall be prepared currently at least once a month.
17 C.F.R. § 240.17a-3(a)(11).
Exchange Act Rel. No. 7550 (Mar. 10, 1965), 1965 SEC LEXIS 653, *1 (Proposal to Amend Rules 17a-3 and 17a-4), adopted in Exchange Act Rel. No. 8023 (Jan. 18, 1967), 1967 SEC LEXIS 446 (Adoption of Amendments).
See WCBA Invs., Inc., 1970 SEC LEXIS 3028 (Jan. 30, 1970). In WCBA, respondents admitted to a Commission investigator that they failed to create and maintain trial balances but argued that the information was contained in the general ledger. We found that the "accountant's testimony in which he attempts to equate the general ledger to a trial balance is manifestly unacceptable." Id. at *5.
At the hearing Barbera had argued that the NASD's "rationale" for not immediately approving KBC's subordinated loan agreement was "manufactured."
Barbera's hearing was conducted pursuant to NASD Code of Procedure Rules in effect prior to August 7, 1997 (the "Old Rules"). Under the Old Rules, a respondent was entitled, upon request, to have made available any documentary evidence that the NASD intended to present at the hearing no later than five business days prior to the hearing. See former NASD Code of Procedure Rule 9224, NASD Manual (1996). The scope of the NASD's offer is consistent with the provisions of current NASD Code of Procedure Rule 9251.
See Gilad J. Gevaryahu, 51 S.E.C. 710, 712-13 (1993)(president, FINOP and member firm all held liable for net capital violations; FINOP's contention that president lied and withheld information did not relieve FINOP of responsibility for violations because once he "agreed to serve as the firm's FINOP, and for as long as he retained that position, he was responsible for carrying out its attendant duties and obligations"). See also Peter Thompson Higgins, 51 S.E.C. 865, 869 n.9 (1993)(even if NASD failed to bring proceeding against one participant in the transaction, such action would not affect the liability of another individual found to have violated rules).
Eric M. Diehm, 51 S.E.C. 938, 942 (1994).
15 U.S.C. § 78s(e)(2).
See, e.g., James S. Pritula, Exchange Act Rel. No. 40647 (Nov. 9, 1998), 68 SEC Docket 1434, 1439 n.13 (FINOP was responsible for ensuring net capital compliance).
See NASD Sanctions Guidelines (1996 ed.) at 35 & 40 (Net Capital and Recordkeeping Violations).
Accord, Ashton Noshir Gowadia, Exchange Act Rel. No. 40410 (Sept. 8, 1998), 67 SEC Docket 2902, 2908 ("The NASD also reasonably concluded that [applicant's] knowledge of NASD Regulation rules and procedures seems to be inadequate so that requalification by examination at the completion of his suspension would be appropriate."); Leonard John Ialeggio, Exchange Act Rel. No. 40028 (May 27, 1998), 67 SEC Docket 704, 707 (requalification requirement is a "reasoned means of re-educating [applicant] about his regulatory responsibilities to both his customers and his employer").
We have considered all of the parties' contentions. We have rejected or sustained these contentions to the extent that they are inconsistent or in accord with the views expressed in this opinion.