SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 37217 / May 14, 1996 Admin. Proc. File No. 3-8807 ------------------------------------------------ In the Matter of the Application of : : JOHN G. PEARCE : 6342 Forest Hills Blvd., Suite 300 : West Palm Beach, FL 33415 : : 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 Violations of Rules of Fair Practice Conduct Inconsistent with Just and Equitable Principles of Trade Failure to Pay Arbitration Award Where a person associated at the time of these events as registered principal with a then member firm of registered securities association failed to honor an arbitration award made against him, held, association's finding of violation and sanctions it imposed sustained. APPEARANCES: Michael O. Morse, for John G. Pearce. T. Grant Callery and Carla J. Carloni, for the National Association of Securities Dealers, Inc. Appeal filed: September 12, 1995 Briefing completed: December 5, 1995 I. John G. Pearce, formerly a registered principal with a firm then a member of the National Association of Securities Dealers, Inc. ("NASD"), appeals from NASD disciplinary action. The NASD ==========================================START OF PAGE 2====== found that Pearce violated Article III, Section 1 of the NASD's Rules of Fair Practice by failing to honor an arbitration award entered against him. 1/ The NASD censured Pearce, fined him $10,000, and suspended him in all capacities for ninety days and thereafter until he fully satisfies the award. 2/ Our findings are based on an independent review of the record. II. This case arises from Pearce's failure to pay an arbitration award issued on February 24, 1994 in an NASD arbitration proceeding. The award ordered Pearce to pay $85,000 to Lee and Barbara Bernardis, public customers for whom he was the account executive. On June 26, 1994, Pearce entered into a settlement agreement with the Bernardis for $42,000. After making an initial $2,000 payment, he failed to comply with his agreement to pay the remaining $40,000 within 30 days. Pearce claims that he made subsequent efforts to settle the matter with the Bernardis, but that their attorney would not entertain further settlement discussions. He also asserts that an NASD investigation somehow prevented him from raising funds to pay the award. 3/ Following Pearce's failure to honor the settlement agreement, the Bernardis sought to have the arbitrators' award confirmed. Pearce counterclaimed unsuccessfully to have the award vacated by the New York court on procedural and other grounds. Judgment was entered against Pearce by the New York Supreme Court on August 24, 1994. Pearce did not appeal the judgment. Pearce has not made any additional payments towards the award. 4/ 1/ Article III, Section 1 requires that members must "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/ The arbitration panel that heard the Bernardis' case referred the underlying conduct to the NASD staff. Pearce states that no disciplinary action occurred as a result of that investigation. 4/ In December 1994, the Bernardis attempted to obtain by a court order about $5,000 from funds in Pearce's pension and profit sharing account. The record indicates that the Bernardis have not yet received those funds since Pearce claims that their removal from his retirement account would violate the Employee Retirement Income Security Act. We (continued...) ==========================================START OF PAGE 3====== Pearce claimed that he did not have sufficient funds to pay the award. David K. Silverberg, one of the Bernardis' lawyers, testified at the hearing before the District Business Conduct Committee ("District Committee"). Silverberg stated that Pearce had provided his law firm with income tax returns and a sworn financial statement, but stated that these documents did not show that Pearce was unable to pay the award. 5/ Pearce did not submit either the financial statement or his tax returns to the NASD or the Commission. Pearce also admitted that he had made no attempt to secure a line of credit or obtain a loan to satisfy the arbitration award. III. Pearce attacks the fairness of the underlying arbitration proceeding between the Bernardis and him. 6/ However, an applicant may not collaterally attack an arbitration award in a disciplinary proceeding for failure to pay that award. The Commission has held that the NASD arbitration system provides a speedy mechanism for settling disputes, 7/ which the NASD may 4/(...continued) understand that the Bernardis have submitted that issue to the New York Supreme Court. Pearce asserted before the National Business Conduct Committee that the Bernardis were unsuccessful in that forum. 5/ Silverberg testified that, although the financial statement showed that debt exceeded equity on one of Pearce's West Palm Beach homes, the document also showed that Pearce owned other real estate with $12,000 in equity and that Pearce owned $55,000 in stocks and bonds. Pearce stated that the bank had begun foreclosure proceedings on one of his West Palm Beach real estate parcels. Pearce said the stocks and bonds mentioned in the financial statement were not publicly traded, but in fact consisted of the stock of his brokerage firm, which was now closed. He further stated that, when the firm closed, its capital was distributed to shareholders. He testified that he had opened the member with funds obtained from a private placement and that he owned only one percent of the firm. 6/ Pearce argues that: (1) the chairman of the arbitration panel had a conflict of interest; (2) the arbitration panel exceeded its authority when it made a disciplinary referral concerning Pearce; and (3) the panel should have ruled in his favor on statute of limitations questions. He raised these grounds before the New York Supreme Court, but the court refused to vacate on these bases. 7/ Eric M. Diehm, 51 S.E.C. 938, 939 (1994). ==========================================START OF PAGE 4====== foster by taking prompt action against those who fail either to honor arbitral awards or have them set aside: To 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. 8/ Pearce also argues that the NASD improperly failed to provide tapes of the arbitration hearing, thereby compromising his ability to challenge the arbitration decision in the New York courts. 9/ Pearce testified without contradiction that he made unsuccessful requests for the tapes, and the record reflects that his counsel made at least one written request. The NASD has not argued that it made the tapes available, nor explained the reason that it failed to supply them. Pearce cannot collaterally attack the arbitration process in a disciplinary proceeding. The appropriate forum for Pearce to have challenged the failure to provide the tapes was the New York Supreme Court. In his answer and counterclaim in the Supreme Court, Pearce represented that his counsel was attempting to obtain the tapes. However, the record contains no showing that he complained to the Supreme Court of the NASD's failure to produce them or sought the court's process to obtain their production. Nor did he appeal the Supreme Court's confirmation of the award. His argument may thus be deemed to be waived. Pearce's remaining argument is that he did not violate the Board of Governors' resolution regarding the Failure to Act Under Provisions of Code of Arbitration Procedure. That resolution provides, in relevant part: It may be deemed conduct inconsistent with just and 8/ 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). 9/ The NASD Manual provides that "[a] verbatim record by stenographic reporter or tape recording of all arbitration hearings shall be kept" and that a party or parties who "elect[s]" to have the tapes transcribed shall bear the cost. NASD Manual (CCH) 3737, p. 3725 (1994). Accordingly, we believe that the NASD must provide the tapes or (for a fee) transcripts promptly upon request. They are integral to an applicant's ability to bring an action to vacate an award. ==========================================START OF PAGE 5====== equitable principles of trade and a violation of Article III, Section 1 of the Rules of Fair Practice for a member or a person associated with a member . . . to fail to honor an award of arbitrators properly rendered pursuant to the Uniform Code of Arbitration under the auspices of the National Association of Securities Dealers, Inc. . . . where a timely motion has not been made to vacate or modify such award pursuant to applicable law. 10/ Pearce argues that, because he made such a timely motion to vacate the award, he is not liable under the Board of Governors' resolution. Pearce's interpretation is untenable. His motion to vacate the award was denied and the award was confirmed by the court and reduced to judgment. The Board of Governors did not intend to release an applicant from his responsibility to pay simply because an unsuccessful motion to vacate had been filed. Otherwise, any associated person could avoid discipline for failure to pay an arbitration award for the cost of filing a pro forma motion to vacate. Here the intent of the Board of Governors is to require associated persons promptly to pay arbitration awards, except while the awards are actually being challenged. 11/ IV. Pearce does not attack the sanctions imposed by the NASD. We do not find they are either oppressive or excessive. The fine assessed here is that set forth in the NASD's sanction guidelines for a failure to satisfy an arbitration award. While the ninety- day suspension is at the upper end for such an offense, the National Business Conduct Committee ("National Committee") found that substantial sanctions were warranted since Pearce "engaged in egregious misconduct in abusing the arbitration process". Pearce has not demonstrated that he was in a bona fide insolvent condition that prevented him from paying the award. His testimony that he did not pay the award because he did not have 10/ NASD Manual (CCH), 3748, p. 3731 (1994)(emphasis added). 11/ This result is consistent with our precedent. In Richard J. Lanigan, this Commission affirmed the NASD's sanction of a registered representative who failed timely to pay an arbitration award. Securities Exchange Act Release No. 36028 (July 27, 1995), 59 SEC Docket 2693. Lanigan had made an unsuccessful motion to vacate the arbitration award. Nonetheless, the Commission concluded his failure timely to pay it was conduct inconsistent with just and equitable principles of trade. Id. at 2696-97. ==========================================START OF PAGE 6====== the funds and could not borrow or obtain funds was not credible. The Committee further noted that, even after Pearce negotiated a settlement for less than half the amount of the award, he failed to pay the agreed-upon sum. Accordingly, we sustain the sanctions imposed by the NASD. An appropriate order will issue. 12/ By the Commission (Chairman LEVITT and Commissioners WALLMAN, JOHNSON, and HUNT). Jonathan G. Katz Secretary 12/ All of the contentions advanced by the parties have been considered. The contentions are rejected or sustained to the extent that they are inconsistent or in accord with the views expressed in this opinion. UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. 37217 / May 14, 1996 Admin. Proc. File No. 3-8807 : In the Matter of the Application of : : JOHN G. PEARCE : 6342 Forest Hills Blvd., Suite 300 : West Palm Beach, FL 33415 : : 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 taken by the National Association of Securities Dealers, Inc. against John G. Pearce, and its assessment of costs with respect to him, be, and they hereby are, sustained. By the Commission. Jonathan G. Katz Secretary