In 2002, NASD’s Enforcement Department had investigations underway that centered on the practices and policies of CSFB’s Global Technology Group headed by Quattrone. The investigations centered on IPO spinning and conflicts of interest between research analysts and investment bankers. On Feb. 3, 2003, CSFB issued a press release announcing that it had placed Quattrone on administrative leave because of questions about whether Quattrone was aware of pending criminal and regulatory investigations when he sent an email to certain CSFB employees regarding document retention issues.
That same afternoon, NASD Enforcement sent Quattrone’s attorneys a letter requesting that he appear on Feb.12, 2003, for an on-the-record interview.
At his attorneys’ request, NASD Enforcement agreed to postpone Quattrone’s testimony and to take that testimony near Quattrone’s home in San Francisco because of issues concerning Quattrone’s health. But ultimately, Quattrone’s attorneys informed NASD Enforcement that he declined to testify in any location, because of pending state and federal investigations into the same misconduct. In March 2003, NASD Enforcement charged Quattrone with violating NASD conduct rules by refusing to testify. Quattrone answered the charges by denying any wrongdoing; arguing that because of ongoing criminal investigations into the same misconduct, the Fifth Amendment prevented NASD from compelling him to testify, and asserting that by trying to force him to waive his constitutional right against self-incrimination, NASD violated its statutory duty to provide him with a fair opportunity to defend himself.
In a ruling issued on Jan. 16, 2004, an NASD hearing panel found that Quattrone violated NASD rules by failing to provide on-the-record testimony to NASD. The panel fined Quattrone $30,000 and suspended him for one year, with the proviso that he would be barred in all capacities if he failed to testify, fully and unconditionally, within one year.
NASD appealed the sanctions imposed by the hearing panel, arguing that the appropriate sanction was a permanent bar from the industry. Quatttrone cross-appealed the panel’s finding of liability.
NASD’s NAC rejected Quattrone’s Fifth Amendment privilege arguments, saying the Fifth Amendment “restricts only governmental conduct,” and NASD’s function as a regulator of the securities industry does not constitute government conduct. “NASD is incorporated as a private corporation, it does not receive state or federal funding, and its Board of Governors is not composed of government officials or appointed by a government official or agency,” the NAC says in its ruling.
The NAC also rejected Quattrone’s argument that NASD Enforcement failed to provide him with a fair opportunity to defend himself. To the contrary, it found that NASD Enforcement satisfied its statutory obligation and provided Quattrone with the procedural safeguards required by the federal securities laws.
“Enforcement made written requests for Quattrone’s on-the-record testimony… Pursuant to Quattrone’s request, the testimony was rescheduled and relocated,” the NAC’s ruling says. “Enforcement’s written requests for testimony stated that if Quattrone failed to comply, NASD could take disciplinary action against him that could result in sanctions, including a suspension or a bar from the securities industry. Quattrone was represented by counsel at all times, and he made a fully informed choice to refuse to provide testimony to NASD…”
The NAC ruling goes on to state that NASD’s investigation into Quattrone’s email regarding document retention issues at CSFB was more than justified, saying, “There is no question that such questions regarding obstruction of justice are at the heart of NASD’s regulatory role in preventing securities fraud and protecting investors.”
“In view of the serious nature of Quattrone’s misconduct and the lack of mitigating facts, we conclude that a bar is necessary in this case to protect the integrity of NASD’s investigative responsibilities and its role as an SRO, serving the public interest,” the NAC says in its ruling. “As a private entity without subpoena power, NASD must rely on (its procedural rules) to compel industry members to provide requested information about potential violations of the federal securities laws and NASD rules. Quattrone failed to meet his obligation to cooperate with Enforcement in its investigation, and therefore a bar is appropriately remedial… We find that Quattrone’s misconduct was egregious. Accordingly, we order that Quattrone be barred in all capacities.”
The NAC is a 14-person committee composed of seven industry and seven non-industry members that decides appeals from disciplinary, membership, and exemption decisions; rules on statutory disqualification applications; and advises on other policy matters. NAC rulings can be appealed within 30 days to the Securities and Exchange Commission (SEC). An SEC ruling can be appealed to the U.S. Court of Appeals. Either party could petition the U.S. Supreme Court to review an appeals court decision.
Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by using NASD's BrokerCheck. NASD makes BrokerCheck available at no charge to the public. In 2003, members of the public used this service to conduct more than 2.8 million searches for existing brokers or firms and requested almost 180,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to BrokerCheck at www.nasdbrokercheck.com. Investors can also access this service by calling 1-800-289-9999.
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