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The regulatory arm of the National Association of Securities Dealers (NASD) Inc. was not acting as an agent of federal prosecutors when it sought interviews with principals in a securities case while a related grand jury investigation was ongoing in the Eastern District, a federal judge ruled Monday. Issuing his findings following a hearing and a trial, U.S. District Judge Lewis A. Kaplan of the U.S. District Court for the Southern District of New York rejected claims by plaintiffs that their right to invoke the Fifth Amendment privilege against self-incrimination would be compromised by being forced to answer questions in NASD Regulation Inc.’s private investigation. The plaintiffs in the case, D.L. Cromwell Investments Inc. v. NASD Regulation Inc., 01 CIV 0728, were four employees of D.L. Cromwell Investments Inc., including owner Lloyd Beirne, who claimed they were targeted by NASD Regulation because they have invoked the Fifth Amendment and refused to cooperate with the Federal Bureau of Investigation into trading in the shares of a Florida-based company, Pallet Management Systems Inc. At issue was the formation in 1998 of a unit to assist criminal prosecutions within NASD Regulation’s Division of Enforcement. The unit, known formally as the Criminal Prosecution Assistance Group, or CPAG, has one attorney whose job is to assist federal and state securities investigators. That attorney, Bruce Bettigole, is occasionally designated a Special Assistant United States Attorney to facilitate cooperation, and under Federal Rule of Criminal Procedure 6(e) and pursuant to court order, is given access to grand jury materials. The suit alleged that the four plaintiffs were forced to make, in Judge Kaplan’s words, a “Hobson’s Choice” between expulsion from the securities industry, or at least a heavy sanction, and risk incriminating themselves in a pending grand jury investigation. They also claimed that, while NASD Regulation is ostensibly a private actor, the criminal assistance unit’s proximity to the Division of Enforcement (DOE) — they share offices and report to the same superior at NASD — rendered it a state actor. “In short, the physical circumstances of CPAG and the DOE provide no assurance that confidential material in the hands of CPAG does not come to the attention of DOE investigators or that information concerning DOE investigations does not come to the attention of CPAG personnel,” Kaplan said. “One is left to trust the good faith and judgment of the personnel involved.” Kaplan disagreed on both counts. He said there is no Fifth Amendment issue unless “it fairly may be said that its actions are fairly attributable to the government,” and, here, “there is no direct evidence of such governmental involvement. “Indeed, all of the relevant Regulation personnel — i.e. all of those involved with the DOE investigation and every member of CPAG — flatly deny that the … demands [for interviews] are the product of any urging or suggestion by the United States Attorney’s office or any other governmental agency.” Plaintiffs, he said, nonetheless said that that testimony should be disregarded and the court “should infer that DOE is acting as the cat’s paw of the government.” INQUIRY ‘WALLED OFF’ But Kaplan said he was satisfied by the evidence that “there is no connection” between the investigation being carried out by DOE and the grand jury investigation, adding that the unit’s personnel are, “figuratively speaking, ‘walled off’ from the other activities of the DOE.” He said that the demands for interviews “are the product of an entirely independent action” by the DOE staff conducting Regulation’s private investigation of Cromwell and the trading in Pallet. Therefore, Kaplan refused to enjoin the interviews. OTHER CONTENTIONS In addition to being coerced into giving up their Fifth Amendment rights, the plaintiffs also contended that government criminal investigators improperly shared secret grand jury materials with NASD Regulation. But Kaplan said “there is simply no credible proof that any materials subject to Rule 6(e) have been disclosed to or used by Regulation personnel who have not been authorized by the court to have them.” The plaintiffs, he said, “have failed to show that those documents, seized pursuant to a warrant, were matters occurring before the grand jury and therefore within the protection of Rule 6(e).” He said there was “a certain amount of contact between the government, CPAG and DOE staff concerning Cromwell in a period during which both the U.S. Attorney’s office and DOE were conducting investigations of the company. “While the Court has found that Regulation’s DOE was not an instrumentality of the government in seeking these … interviews and that there was no violation of grand jury secrecy in this case, Regulation may wish to give careful attention to its arrangements concerning assistance to criminal investigations and to the relationships, both physical and administrative, between the CPAG and the DOE,” he said. “The present arrangements left doubt sufficient to require a trial as to the independence of DOE’s [interview] requests in this matter, a situation that perhaps could have been avoided by more careful controls.” Martin P. Russo, Jason M. Ewasko and Herbert M. Jacobi represented the plaintiffs. Terri L. Reicher, Assistant General Counsel, represented the National Association of Securities Dealers Inc.

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