A federal judge in the Southern District Court of New York dismissed last June a $40 million lawsuit filed against the NASD that alleged the regulator had unfairly influenced a 1993 election for a seat on the NASD's board of governors.
Alan Davidson, president of Zeus Securities in Jericho, N.Y., filed the suit late last year. He has decided against appealing the case to the SEC. The SEC cannot award monetary damages, he notes, and an appeal would be costly.
It was the court's belief that the SEC oversees NASD activities and would be the best authority to make a ruling in the case, Davidson explains. "This case proves that there is no right of action against the NASD," he says.
According to exhibits filed in the case, an NASD New York district nominating committee sent an October 1993 letter to members in the district urging support for Davidson's opponent in the board of governors' race, Dennis Hensley, head of compliance at J.P. Morgan. The letter was printed on NASD letterhead.
Davidson complained and was told by the NASD District 10 (New York) director that the district office would remain neutral. T. Grant Callery, then and currently NASD general counsel, wrote to Davidson Nov. 9 and claimed the district committee had done nothing wrong. Two days later, the chairman of the district nominating committee sent another letter, again on NASD letterhead, to industry executives in the district once more urging support for Hensley. The letter said district members would be "provided with the resources and assistance you need" in getting the vote out for Hensley.
Davidson also complained to the SEC, and says he was told the agency would "watch" the election.
Hensley won the Dec. 30, 1993, election with 60% of the vote.
In its remedial sanctions against the NASD last year, the SEC found that Davidson's unusual electoral challenge was handled inappropriately and that volunteers recruited by the New York district's nominating committee "actively campaigned in support of the successful candidate."
The Rudman committee in 1995 also criticized the NASD's handling of the election.
What specifically were District 10 members urged to do? Registered Representative interviewed more than a dozen current or former NASD members and staffers. None will speak about the case or talk on the record. One NASD member summed it up this way: "The NASD is a regulatory body; no one wants retaliation for improper remarks."
Davidson got on the ballot as a dissident candidate by securing signatures from 10% of the member firms in the district. District 10 has about 1,400 broker/dealer members.
Prior to his campaign for board member, Davidson was active with various other NASD committees. He says he even created a business conduct booklet, which was widely distributed to members.
To be sure, some NASD members said they see nothing wrong with the nominating committee securing a position for someone they know. "It means they are familiar with his traits which they deem admirable," says one NASD member who participated in the election in 1993 and asked not to be identified.
But using NASD resources to campaign for a particular candidate is against NASD rules. But at the time, NASD staff took direction from industry committees such as the district nominating committees. Under the SEC's 1996 action against the NASD, the power of these committees was removed, and they now function in an advisory capacity.
Hensley, Davidson's opponent, was moved to the NASDR board early last year as part of the NASD's reorganization. NASD board members are no longer elected by districts; under the reorganization, NASD member firms elect at-large nominees chosen by an NASD national nominating committee.