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U.S. Securities and Exchange Commission

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.

SECURITIES EXCHANGE ACT OF 1934
Rel. No. 43748 / December 20, 2000

Admin. Proc. File No. 3-9775

In the Matter of the Application of

TONY R. SMITH
275 W. 96th Street, #23-C
New York, New York 10025

For Review of Action Taken by the
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.

OPINION OF THE COMMISSION

    REGISTERED SECURITIES ASSOCIATION -- REVIEW OF INDEFINITE SUSPENSION

      Failure to Honor Settlement Agreement

    Former registered representative of an NASD member firm failed to honor a settlement agreement executed in connection with an arbitration proceeding. The NASD suspended his registration indefinitely until he submits proof that he satisfied or discharged the obligation or that the settlement was modified or vacated. Held, appeal proceedings dismissed.

APPEARANCES:

    Dan A. Druz, for Tony R. Smith.

    Alden S. Adkins, Katherine A. Malfa, and M. Catherine Cottam, for NASD Regulation, Inc.

Appeal filed: November 9, 1998
Briefing completed: November 10, 1999


I.

Tony R. Smith, formerly a registered representative and principal of L.B. Saks, Inc., a National Association of Securities Dealers, Inc. ("NASD" or "Association") member firm, seeks review of an NASD action. The NASD indefinitely suspended Smith's registration pursuant to Article VI, Section 3 of the NASD By-Laws and NASD Procedural Rules 9510 et seq. when Smith failed to honor a written and executed settlement agreement in connection with an NASD arbitration.1 The suspension is effective until such time as Smith submits proof that: (1) he has paid the settlement amount in full; (2) the parties have agreed to modify their settlement agreement; (3) the settlement agreement has been vacated or modified by a court; or (4) a bankruptcy petition is pending in the United States Bankruptcy Court or the settlement agreement has been discharged in bankruptcy. We base our findings on an independent review of the record.

II.

On December 11, 1997, Smith signed a settlement agreement in connection with an NASD arbitration between Smith and two former clients, Horace and Henrietta Robinson. Smith agreed to pay a total of $42,500 (one payment of $10,000 to be made on or before January 30, 1997 and the balance to be paid in installments of $1,000 a month). The settlement agreement also named Robert V. Lomonaco, another principal at L.B. Saks, Inc., as "jointly and severally liable" with Smith.2 Lomonaco, however, was not named in the underlying arbitration proceeding and never signed the settlement agreement. The settlement agreement stated on its face that "any breach of this agreement may also constitute ground for the imposition of disciplinary sanctions and/or penalties, including butnot limited to suspension under Article VI, Section 3 of the By-Laws of the NASD."

A check for $5,000 was paid to the Robinsons on Smith's behalf on January 20, 1998.3 No further payments were made in connection with the settlement agreement.

On April 10, 1998, the Robinsons' attorney notified the NASD that Smith had failed to abide by the terms of the settlement agreement by not making the agreed-upon payments. The NASD notified Smith that his registration would be suspended on June 26, 1998 until Smith provided the NASD with proof that he had made full payment to the Robinsons or the settlement agreement had been modified, vacated, or discharged. The NASD also notified Smith that he had the right to request a hearing to review the suspension, which Smith subsequently requested.

The hearing officer issued an order scheduling Smith's hearing for July 21, 1998. In this order, the hearing officer notified Smith that the hearing officer would consider only certain specified defenses.4 One of those indicated defenses was an inability to pay the settlement award.

At the hearing, Smith did not testify, called no witnesses, and submitted no exhibits. Smith's defense consisted of questioning theonly witness at the hearing, the Robinsons' attorney, about the validity of the settlement. Smith did not claim at the hearing that he could not pay the agreed amount in accordance with the terms of the settlement agreement, or introduce any evidence about his financial condition.

On October 9, 1998, the hearing officer issued a decision finding that Smith had signed and executed a written settlement agreement submitting to "joint and several liability" with Lomonaco. Moreover, he had begun performance under the agreement by paying $5,000 to the Robinsons. Smith subsequently failed to comply with the terms of the settlement agreement. The hearing officer also found that Smith did not demonstrate that he met any of the conditions that would excuse his failure to comply with the settlement agreement. Accordingly, the hearing officer suspended Smith's registration indefinitely, effective upon service of the decision. Smith appealed the hearing officer's decision to the Commission.5

III.

The NASD suspended Smith's registration until Smith submits proof that: (1) he has paid the settlement amount in full; (2) the parties have agreed to modify their settlement agreement; (3) the settlement agreement has been vacated or modified by a court; or (4) a bankruptcy petition is pending in the United States Bankruptcy Court or the settlement agreement has been discharged in bankruptcy. By imposing an indefinite suspension until Smith can prove that he has satisfied certain requirements, the NASD has effectively barred him from associating with an NASD member.6

Our review of Smith's appeal of his suspension is governed by Section 19(f) of the Securities Exchange Act of 1934.7 Section 19(f) directs that we review actions barring a person from association to determine:

    1) if the specific grounds upon which the NASD based its action exist in fact;

    2) whether the NASD's suspension of Smith's membership was in accordance with its rules; and

    3) whether those rules were applied in a manner consistent with the purposes of the Exchange Act, or imposed any burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act.

Smith admits that he stopped making payments under the settlement agreement after the initial $5,000 payment was made. Smith contends that: the settlement agreement is not valid; he is unable to pay in accordance with the settlement agreement; and he was given insufficient notice of his right to assert inability to pay as a defense before the NASD.8 The NASD responds that Smith's assertions are not meritorious.

Smith argues that, because the settlement agreement was not approved by the arbitration panel, its validity must be established before a member can be sanctioned for failure to honor it. The NASD's By-Laws and Procedural Rules state in relevant part that the NASD may suspend or cancel the registration of any person "for failure to comply with a written and executed settlement agreement." The language specifically includes failure by an associated person topay amounts due under settlement agreements.9 The rule does not require, as Smith appears to contend, that the settlement agreement be reviewed by a panel to determine its validity, but only that the settlement agreement be "written and executed" and be obtained "in connection with" an arbitration or mediation that has been formally instituted.

Smith asserts that the settlement agreement is invalid because Lomonaco did not sign the settlement agreement and

Smith did not intend to be bound by this agreement unless Lomonaco also paid the Robinsons.10 Smith presented no evidence at the hearing to demonstrate that the settlement agreement was invalid. 11

We do not find Smith's contention that the agreement is invalid to be convincing.12 Smith voluntarily signed a contract indicating that he was "jointly and severally liable" for payments totalling $42,500.00. The Robinsons sought payment from Smith. The settlement agreement did not indicate that it was conditioned on Lomonaco's signature. The fact that Lomonaco failed to sign or abide by the settlement agreement does not relieve Smith of his obligation to pay the Robinsons.13

Honoring settlement agreements is important to the functioning of the NASD arbitration system. Requiring members or associated persons to abide by settlement agreements entered into in compromise of a pending arbitration dispute enhances the effectiveness of the arbitration process. It further eliminates unfair impact and waste of resources experienced by the public, other litigants, and the arbitration forum that results when firms and associated persons fail to honor a settlement agreement.14

Smith also alleges that he is unable to pay in accordance with the settlement agreement and was given insufficient notice of his right to demonstrate that inability at the hearing. Smith requests that we remand this matter to the NASD so that he can demonstrate an inability to pay.

Smith has not produced any evidence beyond his unsupported statement to the NASD Board claiming that he is unable to pay.15 Smith admits that he knew he could seek to demonstrate that he was unable to pay as a defense at his NASD hearing. Smith made a conscious decision not to raise this issue. In a letter to the NASD dated October 27, 1998, requesting the NASD to reinstate Smith's registration, Smith's counsel stated:

[q]uite candidly, my client argued with me about exploring this area of his defense, which we only learned of at the eleventh hour, because at the time he believed that he was about to receive a position with another brokerage firm, and he was uncomfortable, in light of his culturalbackground and personal pride, as he put it, "to plead poverty."16

By failing to raise this defense at the hearing, Smith waived his right to assert an inability to pay. As we have stated "[p]ublic policy considerations favor the expeditious disposition of litigation, and a respondent cannot be permitted to gamble on one course of action and, upon an unfavorable decision, to try another course of action."17

Smith asserts that the NASD did not give him timely notice of his right to raise inability to pay as a defense and that this failure denied him due process. While Smith admits that he received notice of this defense eight days before the hearing, he notes that the NASD now notifies respondents months before a hearing, allowing more time to gather and submit proof of this defense.

Smith did not object to the notice he was given at the hearing or request more time to prepare his defense.18 We do not find, on this record, that Smith was denied due process by receiving notice of this defense eight days before the hearing. Smith was afforded a meaningful opportunity to defend himself. Smith chose not to assert that he did not comply with the settlement agreement because he was unable to pay it. Smith cannot now complain about his choice.

We have reviewed this matter under Exchange Act Section 19(f). We find that the grounds on which the bar was based exist in fact, that it is in accordance with the NASD's rules, and that the rules were applied consistently with the statute. The Robinsons have been deprived of the use of the bulk of the funds Smith agreed to pay to them for over a year-and-a-half. Moreover, Smith has shown a complete disregard for the settlement agreement he signed and the NASD Rules which require associated persons to abide by settlement agreements.

An appropriate order will issue.19

By the Commission (Chairman LEVITT and Commissioners JOHNSON, HUNT, CAREY and UNGER).

Jonathan G. Katz
Secretary

UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934
Rel. No. 43748 / December 20, 2000

Admin. Proc. File No. 3-9775

In the Matter of the Application of

TONY R. SMITH
275 W. 96th Street, #23-C
New York, New York 10025

For Review of Action Taken by the
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.

ORDER DISMISSING APPEAL OF ACTION TAKEN BY REGISTERED SECURITIES ASSOCIATION

On the basis of the Commission's opinion issued this day, it is

ORDERED that the appeal filed by Tony R. Smith be, and it hereby is, dismissed.

By the Commission.

Secretary


Footnotes

1 Article VI, Section 3 of the NASD By-Laws permits the NASD, after 15 days written notice, to suspend the registration of any person for failure to comply with a written and executed settlement agreement obtained in connection with an arbitration or mediation submitted for disposition pursuant to the rules of the Association.

2 The agreement provided that Lomonaco "acknowledges that he is jointly and severally liable with Smith for, and will pay his proportional share of, any amounts due and owing to Claimants in settlement of the instant claim." It then recites that Smith and Lomonaco will pay $42,500.00 according to the terms described above.

3 During the NASD hearing, counsel for the Robinsons stated that they would also credit Smith with another $1,000 that he had remitted to Mr. Robinson prior to the arbitration proceeding.

4 The order stated that the only defenses to be considered at the hearing are: (1) whether Respondent paid the award in full or fully complied with the settlement agreement;

(2) whether the claimant has agreed to installment payments or has otherwise settled the matter;

(3) whether Respondent filed a timely motion to vacate or modify the arbitration award and such motion has not been denied;

(4) whether Respondent has filed a petition in bankruptcy and the bankruptcy proceeding is pending, or the award or payment owed under the settlement agreement has been discharged by a bankruptcy court; or,

(5) whether Respondent can document his inability to pay the award.

5 Before appealing the hearing officer's decision, Smith had, on October 21, 1998, requested the NASD to reinstate his registration. In that request, his counsel sought to raise Smith's inability to pay. The NASD's Enforcement Division denied Smith's request. Smith appealed that decision to the NASD Board, which denied the appeal of the refusal to reinstate on November 24, 1998, after this appeal had been filed.

6 We have found previously that an indefinite suspension contingent upon a respondent fulfilling a condition can constitute a bar. In re Frank R. Rubba, Exchange Act Rel. No. 40238 (July 21, 1998), 67 SEC Docket 1775; Richard T. Sullivan, Exchange Act Rel. No. 40671 (November 12, 1998), 68 SEC Docket 1508.

7 15 U.S.C. § 78s(f).

8 Smith stated in a letter dated November 9, 1999 to the Commission appealing the NASD's action that the NASD's "non-summary suspension proceeding is in conflict with the Federal Arbitration Act ("FAA")." Smith never articulated any conflict between the NASD's proceeding and the FAA. Moreover, Smith did not assert any FAA claim in either of his briefs in this proceeding. It appears Smith has determined not to pursue this claim.

9 In 1995, the Commission approved an amendment to Article VI, Section 3 of the NASD By-Laws which permits the NASD to suspend or cancel the membership or registration of a member firm or associated person for failing to honor a written and executed settlement agreement obtained in connection with an arbitration or mediation submitted for disposition pursuant to the rules of the Association. Contrary to Smith's claim that this rule does not encompass settlements such as his, it appears that the Commission approved this rule change in order to address failures to pay in accordance with a settlement. See Exchange Act Rel. No. 36088 (August 10, 1995), 1995 SEC LEXIS 2082.

10 In various provisions the settlement agreement characterizes the obligations it provides in different ways. See, e.g. n.2 supra. The hearing officer determined that the agreement imposed on Smith "joint and several liability" for payment of $42,500.00. For purposes of this proceeding we need not determine the exact extent of Smith's liability. He has not made any substantial portion of the required payments. Our response to his argument that the agreement is invalid because Lomonaco did not sign it is discussed in the text.

11 Smith claims that the hearing officer denied the admission of evidence regarding the invalidity of the agreement. Smith never called any witness or sought to admit any exhibits at the hearing. At the close of the hearing Smith's counsel sought to brief the validity of the settlement agreement, but the hearing officer stated that she was not persuaded that the settlement agreement was invalid and the proceeding could not be used to attack it.

12 The only witness who testified at the hearing was the Robinsons' attorney, Roger Schwartz, who was called by the NASD staff. He believed that the settlement agreement was valid against Smith. Schwartz testified that [i]n my view, it's entirely valid without [Lomonaco's] signature. As I indicated, the . . . circumstance under which Lomonaco was to participate in the settlement was something that was negotiated, apparently between Mr. Smith or Mr. Druz and his attorney and Mr. Lomonaco. I did not in any way consider this agreement conditioned on Mr. Lomonaco signing it or not signing it. If Mr. Smith was interested in obtaining indemnification or contribution from Mr. Lomonaco, he was and remains free to do that. But as the document indicates, this is a joint and several obligation and in my view, at least, I'm certainly free to pursue this amount as against both individuals.

13 The existence of any remedies Smith may or may not have against Lomonaco does not excuse Smith's failure to comply with NASD rules. Peter Thompson Higgins, 51 S.E.C. 865 (1993).

14 To the extent that Smith's attack on the validity of the underlying settlement agreement can be viewed as a collateral attack, we have consistently rejected such attacks asinconsistent with the Exchange Act. The Commission has repeatedly stated, in the context of failure promptly to pay arbitration awards, that: "[t]o permit a party dissatisfied with an arbitral award to attack it collaterally for legal flaws in a subsequent disciplinary proceeding would subvert the salutary objective that the NASD's [arbitration] resolution seeks to promote." John G. Pearce, 52 S.E.C. 796, 798. James Anthony Morrill, 51 S.E.C. 1162, 1164 n.6 (1994), quoting Stix & Co., Inc., 46 S.E.C. 578, 580 (1976); Eric M. Diehm, 51 S.E.C. 938, 941 n.16 (1994); Bruce M. Zipper, 51 S.E.C. 928, 930 n.8 (1993); Peter Thompson Higgins, 51 S.E.C. 865, 868 n.11 (1993); See also Richard R. Pendleton, Exchange Act Rel. No. 40237 (July 21, 1998), 67 SEC Docket 1768.

15 Compare Toney Reed, 52 S.E.C. 944 (1996) (NASD refused to consider respondent's inability to pay when respondent tried to submit evidence into the record). In a letter dated October 27, 1998 to the NASD, Smith included a signed statement that he earned no income during the 1997 tax year and did not anticipate earnings of "any consequence this year."

16 The NASD identified certain documents, including this letter and the letter cited in n.15, supra, as being outside the record in this proceeding. Nonetheless, both parties in their briefs discussed them and made arguments based on their contents.

On October 26, 1999, we gave the parties the opportunity to brief whether these documents were, in fact, part of the record under Rule of Practice 460 or whether they should be admitted to the record as new evidence under Rule of Practice 452 and what significance if any should be attached to them. The NASD argued that the documents are not part of the record before the Commision and that they have little significance in the current appeal, although acknowledging that they contain admissions that Smith had adequate notice that he could introduce evidence concerning inability to pay. Smith argued that the documents were presented to the NASD at a time when it still had jurisdiction over this matter and that the Commission should consider them.

As expert fact-finders, administrative agencies should be inclusive in considering evidence offered by the parties. See, e.g., Charles P. Lawrence, 43 S.E.C. 607, 612-613 (1967). While Rule 460 reflects the competing concern that evidence be offered before the initial fact-finder, the documents at issue here were created in the context of this proceeding, shed light on certain aspects of it, and were used in arguments by both parties in their briefs. Thus, we have determined to consider them.

17 Sidney C. Eng, Exchange Act Rel. No. 40297 (August 3, 1998), 67 SEC Docket 2175, 2185; David T. Fleischman, 43 S.E.C. 518, 522 (1967).

18 Furthermore, Smith has made no efforts, even before the Commission, to document his inability to pay.

19 We have considered all of the contentions advanced by the parties. We have rejected or sustained them to the extent that they are inconsistent or in accord with the views expressed in this opinion.

http://www.sec.gov/litigation/opinions/34-43748.htm


Modified:01/09/2001