SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 37170 / May 8, 1996 Admin. Proc. File No. 3-8888 ________________________________________________ : In the Matter of the Application of : : BRIAN L. GIBBONS : 11126 E. Carol Avenue : Scottsdale, Arizona 85259 : : For Review of Disciplinary Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.: ________________________________________________: OPINION OF THE COMMISSION REGISTERED SECURITIES ASSOCIATION - REVIEW OF DISCIPLINARY PROCEEDINGS Violation of Rules of Fair Practice Providing Inaccurate and Misleading Information to Association Where registered representative of member firm of registered securities association provided inaccurate and misleading information in response to association's request, held, association's findings of violation and the sanctions it imposed sustained. APPEARANCES: Brian Gibbons, pro se. T. Grant Callery and Norman Sue, Jr., for the National Association of Securities Dealers, Inc. Appeal filed: November 22, 1995 Briefing completed: March 6, 1996 I. Brian L. Gibbons, who, during the relevant period, was a registered representative of Franklin-Lord, Inc. ("Franklin-Lord" or the "Firm"), a member of the National Association of Securities Dealers, Inc. ("NASD"), appeals from NASD disciplinary action. The NASD found that Gibbons provided inaccurate and misleading information in response to an NASD staff request for information. The NASD found that Gibbons' conduct violated Article III, Section 1 of the NASD Rules of Fair Practice ("NASD ==========================================START OF PAGE 2====== Rules"). 1/ It censured Gibbons, fined him $10,000, and suspended him from associating with any member in any capacity for 30 calendar days. 2/ Our findings are based on an independent review of the record. II. On August 6, 1993, Franklin-Lord filed with the NASD a Uniform Termination Notice For Securities Industry Registration, Form U-5 ("Form U-5"). The Form U-5 stated that Gibbons was "permitted to resign" because of a "[d]ifference in investment philosophy." The Form U-5 also disclosed that Gibbons was the subject of a customer claim in excess of $10,000 involving the sale of unregistered securities and excessive trading in a customer's account. As a result of the Form U-5's statements, on August 18, 1993, the NASD sent Gibbons a letter at the address of his new employer, Dickinson & Co. The NASD requested information about purchases of Busline Media securities by one of Gibbons' customers. 3/ Among other questions, the NASD asked Gibbons about the amount of commissions that he had received from these Busline Media transactions. Gibbons failed to respond by September 1, 1993, when his response was due. The NASD sent Gibbons a second letter, dated September 9, 1993, requesting that, by September 24, 1993, he provide the information requested in the August 18 letter. On September 10, 1993, the NASD received a response from Gibbons dated August 31, 1993. 4/ In his response to the NASD's request, Gibbons stated that "[t]here was no financial gain to me from Busline Media or Franklin-Lord. The transactions occurred directly with Busline Media and [his 1/ Article III, Section 1 of the NASD Rules requires members to observe high standards of commercial honor and just and equitable principles of trade. NASD Manual (CCH) 2151, p. 2014. 2/ The NASD also assessed costs. 3/ In June 1992, Gibbons' customer had invested $216,500 in Busline Media, and in February 1993 another $108,250. 4/ Gibbons' response was received by the NASD apparently before Gibbons had received the NASD's second request. The return receipt accompanying the September 9 letter is dated September 13, 1993. While Gibbons stated in the opening paragraph of his letter to the NASD that he was responding to the NASD's August 18, 1993 letter, he testified at the hearing before the District Business Conduct Committee ("District Committee") that he had never received the August 18 letter. He now claims that his response to the August 18 letter was delayed because he had to show his response to Dickinson & Co.'s compliance department. ==========================================START OF PAGE 3====== customer]." Sometime thereafter, the Securities Division of Arizona ("SDA") informed an NASD staff supervisor that in the course of the SDA's investigation of Franklin-Lord the SDA had obtained several checks made payable to Brian Gibbons, evidencing that Gibbons, in fact, had received compensation in connection with his customer's purchases of Busline Media securities. In response to this information, the NASD staff supervisor sent Gibbons another letter, dated April 4, 1994, asking Gibbons to detail the amount of compensation that he had received in connection with the Busline Media transactions and to explain why he had failed to disclose this compensation in the August 31 letter. 5/ In an April 11, 1994 letter, Gibbons admitted that he had been paid $30,000 for his customer's purchases of Busline Media securities. He explained that he was paid by a company called Jorgan, Inc., 6/ which he believed was a subsidiary of a company called Franklin-Lord Financial, Inc. 7/ Gibbons asserted, in his April 11 letter, that in April 1993 he was approached by the SDA about his client's purchases of Busline Media securities. Before responding to the SDA's request, Gibbons went to the principals of Franklin-Lord to notify them of the information that he planned to give SDA. Gibbons stated that he was told by the Franklin-Lord principals that if he "implicated Franklin-Lord in any way or told them that I had been paid by anyone associated with them that they would terminate me and deny whatever I had said." He added that Franklin-Lord forced him to draft a letter detailing the information Gibbons would reveal to the SDA. Gibbons further claimed that, in early August 1993, Franklin-Lord officials asked 5/ Gibbons claims that he contacted the NASD staff supervisor and tried to explain what he had done, but was unsuccessful in his attempt. While admitting that he spoke with Gibbons during the period between August and April about issues not having to do with this matter, the NASD staff supervisor denied that Gibbons ever offered him information concerning the Busline Media transactions. 6/ The correct name of this company is not clear from the record. The checks included in the record, made payable to Gibbons, are illegible. The NASD refers to the company as "Jorgan, Inc." and Gibbons refers to it as "Jordan, Inc." We will refer to the company as did the NASD. 7/ Gibbons stated that an individual named George Looschen shared office space with Franklin-Lord. Looschen operated Franklin-Lord Financial Services, Inc. According to Gibbons, Looschen promoted Busline Media, and it was being marketed as a Franklin-Lord product until the SDA began investigating Franklin-Lord. ==========================================START OF PAGE 4====== Gibbons to resign after his customer sued the Firm and Gibbons over the Busline Media transactions. As noted, the Firm filed a Form U-5 with the NASD on August 6, 1993. 8/ Approximately a week later, Gibbons went to the Firm's offices to pick up his final check and some personal belongings. He claims that the principals of the Firm told him that they were going to settle with his client and, if he changed his story, they would alter his Form U-5 to indicate that he had been "terminated with cause," which would cause a delay for Gibbons in getting reregistered with a new firm. 9/ III. Gibbons admits that he received $30,000 as compensation from his customer's purchases of Busline Media securities. He further admits that he did not provide this information to the NASD when first asked in August 1993. It was not until eight months later, when the NASD confronted Gibbons, that he answered their questions more accurately. Gibbons attempts to excuse his conduct by claiming that he was afraid to be completely truthful because of pressure and threats he received from the principals of Franklin-Lord. 10/ 8/ According to Gibbons, the Firm's principals told him that it "would look better for them in the eyes of [SDA] if they no longer had me there." Gibbons resigned on or about August 5, 1993. 9/ His registration was cleared by the NASD for California and New Mexico in October 1993 and for Arizona in January 1994. 10/ Gibbons claimed before the NASD, as he does here, that he merely left out some facts, but was always intending to come forward once he became registered with a new firm. We question Gibbons' intentions since he did not come forward or confess to any misrepresentation until he was called to account by the NASD, several months after the completion of his registration process with Dickinson & Co. See n. 9 supra. He also claims that he volunteered testimony to the NASD about Franklin-Lord's activities. However, the NASD supervisor stated that he discovered Gibbons' misstatements only after the SDA contacted the NASD. Gibbons' offers to confess after his actions were discovered do not mitigate his offense. Gibbons contends that he was truthful in his August 31 letter because he was not paid by Busline Media or Franklin- Lord, but by Jorgan, Inc. However, Jorgan, Inc. was owned by Looschen, the promoter of Busline Media securities and, according to Gibbons, a Franklin-Lord principal. (continued...) ==========================================START OF PAGE 5====== Nevertheless, as a person associated with a member he had a duty to give the NASD full and prompt cooperation when the request for information was made. Otherwise the NASD would be unable to carry out its regulatory functions. 11/ Associated persons are not free to impose conditions on their responses to the NASD's inquiries. 12/ Moreover, based on this record, we question Gibbons' assertions with respect to the Firm's alleged threat. By the time Gibbons had received the NASD's first request for information, Gibbons had left the Firm and was employed by Dickinson. Franklin-Lord had already filed a Form U-5 stating that it permitted Gibbons to resign and disclosing the customer's allegations with respect to Busline Media. 13/ The contents of the Form U-5 triggered the inquiry by the NASD, a fact made clear in the NASD's August 18 inquiry. 14/ 10/(...continued) Gibbons also suggests that his attorney advised him not to come forward until his registration with a new firm was complete. This assertion does not explain Gibbons' original misstatements to the NASD. In any event, we have previously stated that "[r]eliance on counsel is immaterial to an associated person's obligation to supply requested information to the NASD." See Michael Markowski, 51 S.E.C. 553, 557 (1993), aff'd, 34 F.3d 99 (2d Cir. 1994). 11/ See Michael David Borth, et al., 51 S.E.C. 178, 180 (1992). Article IV, Section 5 of the NASD's Rules requires a person associated with a member to report orally or in writing to the NASD when asked by the NASD to do so with regard to any matter under investigation by the NASD. NASD Manual (CCH) 2205, p. 2228. 12/ Michael David Borth, 51 S.E.C. at 181. As an individual registered with the NASD, Gibbons agreed "to abide by its Rules of Fair Practice, which are unequivocal with respect to the obligation to cooperate with the NASD." See Michael Markowski, 51 S.E.C. at 557. 13/ Gibbons also asserts that the Firm and its principals engaged in misconduct with respect to Busline Media securities. We have previously made clear that misconduct by others at a firm does not excuse misconduct of a particular respondent. See, e.g., Richard R. Perkins, 51 S.E.C. 380, 384 n. 19 (1993); C.A. Benson & Co., Inc., 42 S.E.C. 107, 111 (1964). 14/ We further note that, apart from the subject Form U-5, Gibbons admits that his registration had previously been subject to delay due to his prior regulatory history. The District Committee found that Gibbons had been the subject of proceedings instituted by the securities regulators of (continued...) ==========================================START OF PAGE 6====== Gibbons also argues that, in order to find liability under Article III, Section 1, we must find that the alleged conduct "had to do with broker client situations, trading situations, etc." We disagree. We have long recognized that Article III, Section 1 states broad ethical principles that implement the requirements of Section 15A(b) of the Securities Exchange Act of 1934 ("Exchange Act"). 15/ The Exchange Act empowers self- regulatory organizations, such as the NASD, to discipline their members, and persons associated with them, for unethical behavior. 16/ Providing misleading and inaccurate information to the NASD is conduct contrary to high standards of commercial honor and is inconsistent with just and equitable principles of trade. 17/ Accordingly, we find that Gibbons violated Article III, Section 1 of the NASD Rules. 18/ IV. Gibbons argues that the sanctions imposed on him are excessive in comparison with the sanction in an offer of settlement proposed by the NASD staff. 19/ Gibbons asserts that the sanction imposed here should be the same as the sanction 14/(...continued) the States of Florida, New Mexico, and Minnesota for selling securities in those states without being registered. 15/ See William F. Rembert, 51 S.E.C. 825, 826 n. 3 (1993). 16/ Id.; Timothy L. Burkes, 51 S.E.C. 356, 360 n. 21 (1993), aff'd, 29 F.3d 630 (9th Cir. 1994), and the cases cited therein. 17/ Compare John F. Noonan, Securities Exchange Act Rel. No. 35731 (May 18, 1995), 59 SEC Docket 1068 (fabricating evidence for use in an NASD arbitration proceeding violates the standard of just and equitable principles of trade); Thomas R. Alton, Securities Exchange Act Rel. No. 36058 (August 4, 1994), 59 SEC Docket 2978, appeal filed, No. 95- 70715 (9th Cir.)(misrepresentations made on a Form U-4 violate the standard of just and equitable principles of trade); Robert E. Kaufman, 51 S.E.C. 838 (1993), aff'd, 40 F.3d 1240 (3d Cir. 1994) (Table) (misrepresenting applicant's educational background on Form ADV found to violate Article III, Section 1). 18/ Gibbons complains that the NASD staff's December 19, 1994 letter in response to Gibbons' request for a continuance was "prejudicial and inflammatory." We disagree. The NASD's December 19 letter to the District Committee was merely in opposition to his request for a continuance and we find it contained nothing out of the ordinary or inappropriate. 19/ Under the proposed offer of settlement, if approved and accepted, Gibbons would have been censured and fined $2,500. ==========================================START OF PAGE 7====== suggested in the proposed offer of settlement. 20/ We review self-regulatory organization's sanctions to determine whether they are excessive or oppressive. 21/ It is well-established that sanctions in settled cases will differ from those in litigated cases. 22/ Respondents who settle typically receive lesser sanctions than they otherwise might have received because, in fashioning the sanction, the NASD is entitled to take into account pragmatic considerations such as the avoidance of time-and-staff-consuming adversary proceedings. 23/ Unlike the situation in a settled case, here we have a fully developed record on which to assess the sanctions imposed against Gibbons. Providing the NASD with inaccurate and misleading information is a serious violation. To allow an associated person to mislead the NASD without sanction would hinder the NASD's ability to carry out its regulatory responsibility. 24/ We find that the sanctions assessed by the NASD against Gibbons are neither excessive nor oppressive. 20/ It should be noted that this offer of settlement was never presented to either the District Committee nor the National Business Conduct Committee ("National Committee"), as required by the NASD Code of Procedure ("NASD Code"), Article II, Section 11. NASD Manual (CCH)  3031, p. 3029. Article II, Section 11 of the NASD Code of Procedure provides that, if a settlement offer is accepted by the District Committee, the Committee shall propose an Order of Acceptance, which shall not become effective until submitted to, and approved by, the National Committee. Here, since no submission had been made, the remainder of these requirements were not satisfied. Thus, it is not even known whether such sanction would have been acceptable to either committee. 21/ Section 19(e)(2) of the Exchange Act, 15 U.S.C.  78s(e)(2). 22/ See Conrad C. Lysiak, 51 S.E.C 841, 848 (1993), aff'd without opinion, 47 F.3d 1175 (9th Cir. 1995). 23/ See David A. Gingras, 50 S.E.C. 1286, 1294 (1994); Butcher & Singer, Inc. et al., 48 S.E.C. 640, 649 n. 18 (1978); Haight & Co., et al., 44 S.E.C. 481, 512-513 (1971), aff'd without opinion, (D.C. Cir. June 30, 1971), cert. denied., 404 U.S. 1058 (1972). 24/ See, e.g., Jonathan G. Ornstein, 51 S.E.C. 135, 141 (1992). ==========================================START OF PAGE 8====== An appropriate order will issue. 25/ By the Commission (Chairman LEVITT and Commissioners WALLMAN, JOHNSON, and HUNT). Jonathan G. Katz Secretary 25/ All of the contentions advanced by the parties have been considered. They are rejected or sustained to the extent that they are inconsistent or in accord with the views expressed herein. UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. 37170 / May 8, 1996 Admin. Proc. File No. 3-8888 ________________________________________________ : In the Matter of the Application of : : BRIAN L. GIBBONS : 11126 E. Carol Avenue : Scottsdale, Arizona 85259 : : For Review of Disciplinary Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.: ________________________________________________: ORDER AFFIRMING 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 taken by the National Association of Securities Dealers, Inc. against Brian L. Gibbons, and the Association's assessment of costs, be, and they hereby are, sustained. By the Commission. Jonathan G. Katz Secretary