frank quattrone hausmanIn this interview, we take a look at the outrageous punishment imposed on Quattrone in November 2004 by the National Association of Securities Dealers (NASD) and at the even more outrageous basis for that punishment: a lifetime banishment from the securities industry based on Quattrone's invocation of his Fifth Amendment rights. Kenneth G.

Hausman (pictured at left), a lawyer for Quattrone, spoke with the Business Rights Center's Roger Donway about the punishment and about Quattrone's appeal of the draconian penalty. Hausman is an attorney with the firm of Howard, Rice, Nemerovski, Canady, Falk, and Rabkin. This interview was originally published in the March 2005 issue of The New Individualist magazine.
Roger Donway: Exactly how does the NASD come to have this power to bar Mr. Quattrone from the securities industry?
Hausman:  Every member of the securities industry must be a member of a self-regulatory organization. And there is only one, effectively, and that is the National Association of Securities Dealers. So, under SEC rules and United States law, all members of the industry must be members of the NASD, and their employees must be licensed by the NASD. So by barring Mr. Quattrone from the NASD, they've effectively barred him from the industry.
Donway: All right. Now could you please explainwhy the NASD barred Mr. Quattrone from the industry?
Hausman: The ruling of the National Adjudicatory Council (NAC) of the NASD barred Mr. Quattrone from the industry based on his delay in testifying for a third day until after his criminal trial ended. So it was for delaying his testimony. The NASD Hearing Panel that first heard the case only disciplined Mr. Quattrone with a one-year suspension and a $30,000 fine. The one-year suspension was contingent on Mr. Quattrone's testifying within one year of the suspension date, which Mr. Quattrone did in July and October of 2004, when he testified for an additional three days—and that's in addition to the two days he previously testified in October 2002. The National Adjudicatory Council of the NASD reversed the Hearing Panel's finding and increased the discipline to a bar. And that is now being appealed to the Securities and Exchange Commission.
Donway:  I see. So he's barred from the NASD, and thus the securities industry, because he invoked his Fifth Amendment rights in an attempt to delay his testimony until his criminal case was over?
Hausman: Mr. Quattrone asked to delay his third day of testimony, and any future days of testimony, until after the criminal proceeding, and the NASD refused that request. Now, subsequently, after the NASD Hearing Panel's decision, Mr. Quattrone did testify, for a third, a fourth, and a fifth day, answering all the NASD's questions—and this was before the NAC reversed the Hearing Panel's decision and put in place a bar from the NASD.
Donway:  So the question is whether the NASD can punish a person for not testifying in a disciplinary proceeding or whether that is a government investigation and therefore must observe a person's Fifth Amendment rights. What's the answer?
Hausman:  There is a case going on now where the SEC takes the same position [as Quattrone's appeal] with respect to the NASD's status. In that case, the NASD NAC increased a punishment and the SEC reversed it. Now the NASD is going to the District of Columbia Court of Appeals to try to overturn the SEC's reversal of the NAC's decision. And the SEC is taking the position that the NASD can't appeal to the D.C. Circuit Court because the NASD is, in the case of a disciplinary proceeding, a government actor. And if the NASD is a governmental actor, which it is in its disciplinary proceedings, then under the Supreme Court ruling in Brentwood (531 U.S. 288 [2001]) and the U.S. Constitution, it must observe a party's constitutional rights, including a constitutional right under the Fifth Amendment against compelled testimony.
Donway:  What is the name of this case between the NASD and the SEC?
Hausman:  I think it's titled NASD v. SEC. You will see language in the SEC's brief which mirrors language in our briefs to the SEC. That is, I'm talking about the SEC's briefs to the D.C. Circuit, in the NASD's attempt to appeal an SEC decision. And in those briefs the SEC notes that when the NASD is functioning in its disciplinary authority it is acting as a governmental actor, with delegated authority from the SEC under United States statutes, and so it is a governmental entity. And that is precisely the same position that Mr. Quattrone is taking in his appeal from the NAC to SEC.
Donway:  The NASD can't appeal because it is a government actor?
Hausman:  Yes. It seeks to appeal an SEC decision, but only "persons aggrieved" can appeal. And there are court decisions holding that one who is a government actor or a government entity is not a "person aggrieved." So the SEC is taking the position, correctly, that the NASD is a governmental actor or governmental entity when it conducts disciplinary proceedings and thus is not a "person aggrieved." We're taking that same position, that the NASD is a governmental actor, in connection with asserting that the NASD has to observe the basic constitutional rights set forth in the Constitution when it disciplines or conducts a disciplinary proceeding.
"[T]he NASD...has taken the position that it is a governmental entity  immune from suit."    -Attorney Kenneth G. Hausman
As a further aside, I note that actually the NASD itself has taken the position that it is a governmental entity immune from suit. In other words, it is entitled to governmental immunity when it is sued by a member in connection with a disciplinary action. The NASD would like to take a hypocritical position of saying that it is a governmental actor when it is sued but that it is not a governmental actor when it is suing in its disciplinary authority.
Donway:  Are there precedents of people complaining of the NASD's hypocritical approach toward its status?
Hausman:  This case is the first one to raise the issue that the NASD holds hypocritical or different positions with respect to its governmental status when it is defending cases and when it is prosecuting cases.
Donway:  How does it happen that in all this time no one appealed this issue?
Hausman: Well, the cases on immunity are much more recent, and this is an unusual situation, where someone is asserting their constitutional rights in a disciplinary proceeding. And it has occurred since the NASD has persuaded federal courts to grant it, in effect, governmental immunity.
This is the first case to raise this issue since those immunity cases have been out there, and the first one to address the issue after the United States Supreme Court's Brentwood decision. One other court dealt with this but never dealt with the Brentwood decision, and in that Brentwood decision the Court set forth factors when a potentially private entity was acting as a governmental entity that would cause that potentially private entity to be subject to governmental restraints, and subject to abiding by the Constitution.
"Given the SEC's involvement, there is no question that Mr. Quattrone's constitutional rights had to be observed."  Attorney Kenneth G. Hausman
One other factor that makes Mr. Quattrone's case different is that this disciplinary proceeding and investigation that the NASD was conducting was not a NASD-alone investigation. It was a joint investigation with the SEC. And in fact, on SEC letterhead, the SEC told Mr. Quattrone that this was a "joint investigation" by the SEC, the NASD, and the NYSE [New York Stock Exchange]—just days before he asked to delay his testimony. Given the SEC's involvement, there is no question that Mr. Quattrone's constitutional rights had to be observed.
Donway:  Could you give me some idea of what counterargument you are likely to run into here?
Hausman:  Well, it's difficult to see what counterargument could be run into, other than the NASD may try to say that they should be able to have their cake and eat it too—in other words, get government immunity when they're being sued but not be subject to governmental constraints when they're suing.
Donway:  So you are fairly hopeful about this appeal?
Hausman:  We are appealing to the SEC, and the SEC's position is precisely the same as ours with respect to the NASD's acting in a governmental capacity in investigations and disciplinary procedures. We'll send you the briefs, and I think you can see in some sections of those briefs where the language that the SEC uses about the NASD's conduct is virtually the same as ours—and the fact of the NASD's being a governmental actor.
Donway:  Can you give us any idea of what the time frame for the proceedings will be?
Hausman:  We think that the briefing with the SEC will be completed certainly by the end of May or mid-June. Then a hearing could occur at any time thereafter.
Donway:  Thank you. We will be watching for the outcome.


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