SECURITIES AND EXCHANGE COMMISSION
In the Matter of the Application of
WILLIAM J. GALLAGHER
For Review of Action Taken by the
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
OPINION OF THE COMMISSION
Former registered representative of a former NASD member firm failed to pay in full an arbitration award. The NASD suspended his registration indefinitely until he submits proof that he has satisfied or discharged the obligation, the parties have agreed to modify the award, the arbitration award has been modified or vacated by a court, or the award is the subject of a bankruptcy petition or has been discharged in bankruptcy. Held, appeal proceedings are dismissed.
Marc Menchel, Alan B. Lawhead, and Deborah F. McIlroy, for NASD.
Appeal filed: April 3, 2002
Last brief received: October 4, 2002
William J. Gallagher, formerly a registered representative and principal of W.J. Gallagher & Co. ("WJGC"), a former National Association of Securities Dealers, Inc. ("NASD") member firm, seeks review of NASD action. The NASD indefinitely suspended Gallagher's registration pursuant to Article VI, Section 3 of the NASD By-Laws and NASD Procedural Rules 9510 et seq. on the ground that Gallagher failed to honor an arbitration award. The suspension is effective until Gallagher submits proof that: (1) he has paid the arbitration amount in full; (2) the parties have agreed to modify the arbitration award; (3) the arbitration award has been vacated or modified by a court; or (4) a bankruptcy petition is pending in the United States Bankruptcy Court or the arbitration award has been discharged in bankruptcy. We base our findings on an independent review of the record.
On January 29, 2001, an NASD arbitration panel issued an award holding Gallagher, WJGC, and another party jointly and severally liable for the payment of approximately $194,000.1The Superior Court of California denied Gallagher's motion to vacate the arbitration award and entered judgment against him on June 26, 2001.2 Counsel for the arbitration claimants then informed the NASD of the California court's judgment.
The NASD advised Gallagher in a letter dated August 16, 2001 that his NASD registration would be suspended effective August 30, 2001 unless, prior to that time, he provided the NASD with documentary evidence that: (1) he had made full payment of the award; (2) he had reached an agreement with the arbitration claimants on a payment schedule; (3) the award was modified or vacated by a court (or a motion to vacate or modify the award was pending before a court); or (4) a bankruptcy petition was pending in the United States Bankruptcy Court or the award had been discharged in bankruptcy. The NASD informed Gallagher that he had a right to request a hearing on the NASD's proposed suspension.
Gallagher requested a hearing in a letter dated August 28, 2001. In that request, Gallagher's attorney advised the NASDthat in July 2001 Gallagher had appealed the trial court's denial of his motion to vacate the arbitration award. The attorney asserted that the NASD was not authorized under its rules to suspend Gallagher while the court appeal was pending.
At a September 2001 pre-hearing conference, Gallagher's attorney indicated that his client was unable to pay the award. The NASD then sent a follow-up letter informing Gallagher that, if he intended to assert an inability to pay the award, he should submit a Statement of Financial Condition along with appropriate supporting documentation. On November 7, 2001, Gallagher submitted a Statement of Financial Condition to the NASD.
During another pre-hearing conference in October 2001, Gallagher's attorney urged the Hearing Officer to delay ruling on Gallagher's suspension until the appeal was concluded. The Hearing Officer refused to stay the suspension proceeding. The Hearing Officer explained that he agreed with NASD counsel that the NASD's rules provide a basis for proceeding once the motion to vacate has been denied at the trial court level. The Hearing Officer also observed that he was not aware of any precedent requiring that the NASD's proceeding be put on hold until an appeal is resolved and that any such interpretation of the NASD's rules would conflict with the goal of encouraging expeditious payment of arbitration awards.
A hearing was held in January 2002. At the hearing, Gallagher admitted that he had not paid the full amount of the arbitration award but asserted that his non-payment was due to his inability to pay. On March 15, 2002, the Hearing Officer issued a decision rejecting Gallagher's claim that he was unable to pay the award and suspending Gallagher's NASD registration. This appeal followed.
By imposing an indefinite suspension until Gallagher submits proof that he has satisfied certain requirements, the NASD has effectively barred Gallagher from associating with an NASD member.3 Our review of Gallagher's appeal accordingly is governed by Section 19(f) of the Securities Exchange Act of1934,4 which encompasses a self-regulatory organization ("SRO") determination that bars any person from association with a member.5 Section 19(f) directs that, if we find that "the specific grounds" on which the SRO based its action "exist in fact," that the SRO's determination was in accordance with its rules, and that those rules are, and were applied in a manner, consistent with the purposes of the Exchange Act, we must dismiss an appeal from the SRO's action unless we find that the action imposes an undue burden on competition.6
A. The NASD's suspension was based on its finding that Gallagher has not paid in full the January 29, 2001 arbitration award.7 Gallagher claims that he assigned to the claimants a $350,000 note that WJGC received from Interfirst Capital Company ("ICC"), and that this assignment constituted full payment to the claimants "because they now have a note that is worth as much as the arbitration award." While it is undisputed that the claimants were assigned the note, the record indicates that ICC has made no payments on the note and Gallagher testified beforethe Hearing Officer that ICC has no money to do so.8 We find that the specific ground on which the NASD based its suspension -- failure to pay in full an arbitration award -- "exists in fact."
B. Rule 9511(a) of the NASD's Code of Procedure ("Code") provides for a proceeding to suspend the registration of an individual who has failed to comply with an arbitration award.9 Rule 9513(a) of the Code authorizes the NASD to initiate the proceeding by issuing to the person a written notice that specifies the grounds for, and the effective date of, the suspension, and advises the person of his or her right to file a written request for a hearing pursuant to Rule 9514. The NASD's written notice to Gallagher complied with the requirements of Rule 9513(a). The subsequent hearing satisfied the requirements of Rule 9514(f) of the Code, which specifies the manner in which the hearing is to be conducted: Gallagher testified, was represented by counsel, and was permitted to submit evidence; the hearing was recorded and a transcript was prepared; and a record was compiled. Finally, the Hearing Officer prepared a written opinion, as required by Rule 9514(g) of the Code, specifying his reasons for the suspension.
Gallagher nonetheless contends that the NASD's proceeding was conducted in a manner contrary to the NASD's rules. Specifically, he argues that the NASD Hearing Officer imposed arbitrary standards of proof that violated his right to due process and a fair hearing.10 Gallagher charges that theHearing Officer refused to give credence to substantial evidence he presented that showed his inability to pay the arbitration award. According to Gallagher, the Hearing Officer ruled that Gallagher in fact had assets that could be used to satisfy the award based on "unfounded assumptions" that Gallagher had made "sham" gifts of property to family members to avoid paying the award. We find no record basis for these assertions. Gallagher had the burden of proof to establish his inability to pay the award,11 and the Hearing Officer was entitled to make a rigorous inquiry into Gallagher's claim that he was unable to pay the award.12 As discussed below, Gallagher's "evidence" in this regard was both insufficient and concededly incomplete.
Gallagher's Statement of Financial Condition, which he submitted at the hearing, purported to show an inability to pay. However, in his testimony, Gallagher conceded that the Statementof Financial Condition was inaccurate in several respects and that it underreported his income and assets.13
Further, Gallagher testified that he gave his home to his children in October 2000 (yet still resided in the home, assertedly paying rent to his children) and therefore did not include the home as an asset in the Statement of Financial Condition. Gallagher, however, did not produce a copy of a deed, a rental agreement, or any other documentation reflecting that ownership of the home in fact had been transferred.14 Gallagher testified that there was no mortgage on the home and he estimated that its value was about $420,000 to $430,000. Gallagher submitted no evidence that he could not have borrowed against the home, or otherwise, the necessary money to pay the arbitration award.
In sum, the Hearing Officer was entitled to reject Gallagher's inability to pay defense given Gallagher's failure to show that he in fact lacks the funds to pay and that he has no ability to borrow the necessary monies.15
Gallagher also charges that the Hearing Officer acted improperly in suspending him before a final appellate decision is issued on his appeal of the trial court's denial of his motion to vacate the arbitration award. Article VI, Section 3 of the NASD's By-Laws authorizes the NASD to initiate proceedings to suspend registration for failing to pay an arbitration award if a "timely motion to vacate or modify such award has not been made pursuant to applicable law or where such motion has been denied." It does not require the NASD to delay its process until all appeals of that denial are exhausted.16 We conclude that the NASD's suspension determination was in accordance with its rules.
C. We lastly conclude that the NASD rules at issue are, and were, applied in a manner consistent with the purposes of the Exchange Act. Honoring arbitration awards is essential to the functioning of the NASD arbitration system. Requiring members or associated persons to abide by arbitration awards enhances the effectiveness of the arbitration process.17 Gallagher has harmed the arbitration claimants by forcing them to wait for an extended period of time to satisfy the award and by requiring them to pursue legal avenues, such as garnishment procedures, to collect the amount they are due. Inducing him to pay the award through suspension of his NASD membership furthers the public interest and the protection of investors.
* * *
In sum, we find that the grounds on which Gallagher's indefinite suspension was based exist in fact, that the suspension was imposed in accordance with the NASD's rules, and that the rules are and were applied in a manner consistent with the purposes of the Exchange Act. Accordingly, we dismiss Gallagher's appeal.
An appropriate order will issue.18
By the Commission (Chairman DONALDSON and Commissioners GLASSMAN and CAMPOS); Commissioners GOLDSCHMID and ATKINS not participating.
Jonathan G. Katz
Admin. Proc. File No. 3-10749
In the Matter of the Application of
WILLIAM J. GALLAGHER
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 William J. Gallagher be, and it hereby is, dismissed.
By the Commission.
Jonathan G. Katz
1 This other party has since filed a petition in bankruptcy.
2 The court subsequently issued a Notice of Entry of Judgment on July 20, 2001.
3 Tony R. Smith, Exchange Act Rel. No. 43748 (Dec. 20, 2000), 73 SEC Docket 3806, 3809 n.6; See also Frank R. Rubba, 53 S.E.C. 670, 673 (1998); Richard T. Sullivan, 53 S.E.C. 998, 1003 (1998).
4 15 U.S.C. § 78s(f).
5 The Commission previously has held that Section 19(f) governs its review of SRO action imposing an indefinite suspension, where that suspension is contingent on the fulfillment of a condition, such as the payment of an arbitration award. See Smith, 73 SEC Docket at 3809; Rubba, 53 S.E.C. at 673.
Gallagher misconstrues the applicable review standard when he argues that the NASD's sanction is "excessive and oppressive" and that the NASD's indefinite suspension order is inconsistent with the NASD Sanctions Guidelines, standards relevant in the Commission's review of NASD disciplinary proceedings under Section 19(e) of the Exchange Act, 15 U.S.C. § 78s(e).
6 Gallagher does not claim, and we see no basis for concluding, that his suspension imposes an unnecessary or inappropriate burden on competition.
7 Gallagher paid approximately $3,000 to the arbitration claimants as a result of their garnishment of a portion of his earnings under an August 31, 2001 garnishment order issued by the Los Angeles County Sheriff's Department.
8 Gallagher expressly agreed with the Hearing Officer's assessment that "[t]he note is just a piece of paper."
9 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 arbitration award obtained in connection with an arbitration or mediation submitted for disposition pursuant to the rules of the Association.
10 Gallagher refers in his brief to his rights under the "due process clause." To the extent he is referring to the due process clauses of the Fifth and Fourteenth Amendments to the U.S. Constitution, we note that many courts and this Commission have determined that self-regulatory organizations such as the NASD are not subject to these and other constitutional limitations applicable to governmentagencies. See, e.g., D.L. Cromwell Investments, Inc. v. NASD Regulation, Inc., 279 F.3d 155, 162 (2d Cir.), cert. denied __ U.S. ___, 123 S.Ct. 580 (2002) ("It has been found, repeatedly, that the NASD itself is not a government functionary."); Herbert Garrett Frey, 53 S.E.C. 146, 153 n. 17 (1997) (NASD is not a government actor for purposes of the Fifth and Fourteenth Amendments and Supremacy Clause of the U.S. Constitution).
While SROs, such as the NASD, are not subject to the due process provisions of the U.S. Constitution, Exchange Act Section 15A(b)(8) requires that SROs provide "fair procedures." 15 U.S.C. § 78o-3(b)(8). See Robert Fitzpatrick, Exchange Act Rel. No. 44956 (Oct. 19, 2001), 76 SEC Docket 252, 258; Sundra Escott-Russell, Exchange Act Rel. No. 43363 (Sept. 27, 2000), 73 SEC Docket 1265, 1271.
11 Herbert Garrett Frey, 53 S.E.C. at 151; Daniel Joseph Avant, 52 S.E.C. 442, 446 (1995); Bruce M. Zipper, 51 S.E.C. 928, 931 (1993). As we have stated, "[b]ecause the scope of [the respondent's] assets is peculiarly within [respondent's] knowledge, we think [respondent] should properly bear the burden of adducing evidence with respect to those assets." Zipper, 51 S.E.C. at 931.
12 Zipper, 51 S.E.C. at 931.
13 During cross-examination, Gallagher acknowledged the following inaccuracies:
a. The Statement of Financial Condition failed to include the amount of his wife's income and net worth but included expenses attributable to her;
b. The Statement of Financial Condition failed to include the approximately $19,000 per year that Gallagher received from the Social Security Administration; and
c. Gallagher falsely reported that his checking, savings and money market accounts had no value when, in fact, he had a checking account that had a balance of $2,000 to $3,000.
14 In his reply brief to the Commission, Gallagher attached an unauthenticated Los Angeles County property tax bill which he claims shows that he has not been the owner of the property since November 7, 2000. The NASD has moved to strike this exhibit arguing, among other things, that it is inadmissible under Rule 452 of the Commission's Rules of Practice, 17 C.F.R. § 201.452. Rule 452 provides that the Commission may allow the submission of additional evidence upon a motion by a party that shows with particularity that such additional evidence is material and that there were reasonable grounds for failure to adduce such evidence previously. Gallagher failed to file the requisite motion. Moreover, Gallagher has not made the requisite showing of reasonable grounds for his failure to previously adduce the document. See, e.g., Joseph G. Chiulli, Exchange Act Rel. No. 42359 (Jan. 28, 2000), 71 SEC Docket 1544, 1554 n.24. Accordingly, we have not considered the tax bill which, in any event, does not on its face make clear that Gallagher no longer owns the property.
15 See John G. Pearce, 52 S.E.C. 796, 797-99 (1996) (Commission found respondent's inability to pay argument not credible where respondent failed to submit financial statements or tax returns to the NASD or the Commission and had testified that he had made no attempt to secure a line of credit or obtain a loan to satisfy the arbitration award).
16 By its terms, Gallagher's suspension will terminate if Gallagher submits proof that the arbitration award has been vacated or modified on appeal.
17 Smith, 73 SEC Docket at 3812.
18 We have considered all of the contentions advanced by the parties. We reject or sustain them to the extent that they are inconsistent or in accord with the views expressed herein.