Sometimes the weight of world comes crashing down around your shoulders. I suspect that's how registered representative Jason N. Slezak, his assistant branch office manager (X), and his compliance manager (Y) felt when the New York Stock Exchange piled charge after charge on them for alleged 2002 market-timing violations. See In the Matters of Jason N. Slezak, X, and Y (NYSE Hearing Board Decisions 07-156,-157, and -158, January 9, 2008). (The list of violations is in the sidebar at right).
The Hearing Panel's Analysis
Incredibly, the NYSE Hearing Panel (the Panel) found managers X and Y not guilty, and Slezak was found guilty only of violating NYSE Rule 342.16. Given that sole minor and technical violation, and the lack of evidence of any resulting harm, the panel found that a censure would be the most reasonable and appropriate sanction. Because of the comprehensive analysis and compelling language in the 26-page Slezak decision, I know that I, and many regulatory defense lawyers, will cite this case for years to come.
The panel rejected the argument that Slezak violated the “Know-Your-Customer” rule by failing to uncover the customer's illegitimate business. It reasoned that Slezak visited the customer's office, and saw that it was engaged in what appeared to be a legitimate, ongoing money-management business. Moreover, the customer created an elaborate paper trail to obfuscate the truth.
To sustain a charge of conduct inconsistent with just and equitable principles of trade, Slezak had to have acted in bad faith or unethically. The Panel chastised NYSE for the largely circumstantial nature of its case and noted that:
[H]indsight is 20-20. Having observed Slezak testify, the panel is not convinced that Slezak knew what customer was doing, nor do we find that Slezak acted unethically in failing to make sense of the so-called “red flags” … NYSE Rule 476(a)(6) requires a registered representative to act ethically; it does not require him or her to be a human lie detector or a regulatory investigator …
In addressing various aspects of X and Y's failures to supervise, the panel noted that X and Y were effectively giving one of their best customers one last chance. If customer chose to play by the rules, everyone would benefit; if, however, he chose to commit market timing through the annuities in his Pilot Plus accounts, X and Y would have immediate and conclusive evidence of such wrongdoing. This was a reasonable course of action for X and Y. It is unrealistic to expect a firm to fire a very lucrative client without proof that the client is engaged in illicit activity …
In an ideal world, perhaps X and Y would have uncovered customer's questionable activity sooner. Indeed, their supervision was not perfect. However, that does not mean they were in violation of NYSE Rule 342. The Rule does not impose a standard of perfection; rather, it requires that a supervisor “reasonably discharge his duties and obligations …“
Take that NYSE!
Writer's BIO: Bill Singer
practices law at Stark &Stark, and is the publisher of RRBDLAW.com
THE LAUNDRY LIST
Slezak was charged with violating:
I. NYSE Rule 405(1): He failed to use due diligence to learn the essential facts about his customer;
II. NYSE Rule 440 and Securities and Exchange Act (“34 Act”) Rules 17a-3 and 17a-4: He assisted his customer in opening fictitious accounts, resulting in the keeping of inaccurate books and records;
III. NYSE Rule 342.16: He failed to get prior approval before sending a letter soliciting a potential customer's market-timing business; and
IV. Just and equitable principles of trade: He helped a customer open one or more fictitious trust accounts, purchased numerous variable annuity contracts for the client who used them to improperly time the market, and opened fee-based accounts that the customer used to time the market.
Managers X and Y were separately charged with violating:
I. NYSE Rule 405(1) and (2): They failed to use due diligence to learn the essential facts about the customer and to diligently supervise the registered representative's handling of his customer's accounts;
II. NYSE Rule 342: They failed to appropriately supervise and control the business activity of the rep and his customer; and
III. NYSE Rule 440 and '34 Act Rules 17a-3 and 17a-4: They approved the customer's fictitious new account documents, resulting in the keeping of inaccurate books and records.