|Monday, July 8, 2002
Nancy A. Condon 202-728-8379
Michael Shokouhi 202-728-8304
NASD's National Adjudicatory Council Disciplines Josephthal & Co. for Misconduct During an NASD Arbitration Hearing
Washington, D.C. — NASD's National Adjudicatory Council (NAC) announced it affirmed an NASD Hearing Panel's decision that Josephthal & Co., New York, NY, violated NASD's rule requiring member firms to follow just and equitable principles of trade when it improperly refused to comply with an order of an NASD arbitration panel. The NAC censured Josephthal and ordered it to pay a $10,000 fine.
During a mid-1999 NASD arbitration proceeding brought by two customers against Josephthal, the claimants requested a document pertaining to "supervisory procedures" from the firm. Josephthal objected to the request, claiming the document was protected by attorney-client privilege. The arbitration panel then ordered Josephthal to produce the document for its confidential review. Josephthal again refused, claiming that the arbitration panel's review of the document would potentially waive the attorney-client privilege.
After the arbitration proceeding was concluded in favor of the claimant against Josephthal, NASD's Department of Enforcement filed a disciplinary complaint against Josephthal for failing to produce the document. An NASD Hearing Panel conducted a hearing in the case and ruled Josephthal had violated NASD rules. Josephthal then appealed this ruling to the NAC. Following an independent review, the NAC affirmed the Hearing Panel's findings of violation.
The NAC found that the arbitration panel was "well within its authority" in ordering Josephthal to produce the document to the arbitration panel for a confidential review. The NAC further found NASD's Code of Arbitration Procedure provides that a member firm that fails to abide by an arbitration panel's order to produce a document may be subject to disciplinary action for violation of just and equitable principles of trade. The NAC rejected Josephthal's argument that complying with the arbitration panel's order would have waived the attorney-client privilege.
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. Before being appealed to the NAC, the case was heard by an NASD Hearing Panel. A Hearing Panel consists of an NASD Hearing Officer along with two members of the securities industry.
NASD is the leading private-sector provider of financial regulatory services, dedicated to bringing integrity to the markets and confidence to investors through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business -- from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and member firms. For more information please visit www.nasd.com.