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A former high-flying investment banker challenging an NASD-imposed lifetime ban from the securities industry claims that the NASD wants to have its cake as a private, self-regulating organization and eat it too as a U.S. Securities and Exchange Commission enforcer immune from lawsuits. Former Credit Suisse First Boston banker Frank P. Quattrone argues in an SEC administrative appeal that the NASD unfairly took away his livelihood without due process when it barred him for invoking the Fifth Amendment while he was also under criminal investigation. Quattrone’s appeal of the disciplinary action revisits the issue of the complex relationship between state actors like the SEC and the private, self-regulating organizations that enforce their rules and regulations — in this case, allegedly unrestrained by constitutional checks and balances. The challenge before the SEC also comes at a time when markets are changing, and a trend is emerging in case law identifying self-regulating organizations more closely with the public sector rather than the private. NASD, formerly known as the National Association of Securities Dealers, is an association of brokers and dealers in the over-the-counter securities business empowered by the Maloney Act of 1938 to regulate the affairs of securities firms and to promote fair and ethical practices in the securities business. Under federal law, virtually every securities firm doing business with the United States public is a member of the NASD, according to its Web site. TWO SIDES OF SELF-REGULATION Robert Todd Lang, a senior partner at Weil, Gotshal & Manges in New York whose practice includes securities law, said cases such as Quattrone’s reveal both the problems and the advantages of the system of self-regulation in place, which, he said, is mature and serves the public interest well just as it is. “The question to ask is whether this system of self-regulation is something that will continue, or will there be an alternative?” Lang said. For instance, NASD’s licensing and delicensing of securities professionals — a key issue raised by the Quattrone appeal and something Congress did when it made NASD a self-regulating system — is under reconsideration with changes in the market, Lang said. Events such as the merger of the all-electronic stock market Archipelago Holdings Inc. into the New York Stock Exchange to create a publicly traded, for-profit enterprise known as NYSE Group Inc. could have a significant impact, he said. The new company would spin off the NYSE’s regulatory arm as a not-for-profit entity called NYSE Regulation, a self-regulatory organization similar to NASD. Also, there is a possibility that Nasdaq Stock Market Inc. will buy the electronic trading network Instanet Group Inc. Nasdaq has not yet taken itself public. Quattrone’s lifetime ban stems from his refusal to comply with an NASD department of enforcement request for testimony in an investigation involving his purported destruction of evidence and obstruction of justice while heading Credit Suisse First Boston’s global technology group. NASD had been investigating allegations of “IPO spinning” and conflicts of interest between research analysts and investment bankers at Credit Suisse. Quattrone asserted his Fifth Amendment right not to incriminate himself by giving on-the-record responses to NASD investigators because he also was under criminal investigation at the time. NASD argues that by refusing to respond to its inquiry, Quattrone “violated the cornerstone principle of securities industry self-regulation that associated persons must cooperate with investigations,” according to a reply brief it filed recently in the SEC administrative action. Quattrone’s “assertion that NASD is a state actor that must recognize his claimed Fifth Amendment privilege against self-incrimination has no basis in law or the facts of this case,” the NASD brief says. Quattrone flatly rejects this view. “NASD’s assertion that it is not bound by the constitution asks the commission to close its eyes to three decades of major, cumulative changes that have made the NASD an exclusive, federally mandated disciplinary and licensing body,” Quattrone’s brief states. Despite its claim that it is a private entity, the NASD “exercises delegated governmental powers in its disciplinary activities; [its] disciplinary function is entwined with governmental policy; and the government has given [it] exclusive licensing control over securities professionals’ right to practice their profession,” the brief argues. Jerome B. Falk Jr., an attorney for Quattrone at San Francisco’s Howard Rice Nemerovski Canady Falk & Rabkin, said recent opinions issued by state and federal courts in California that are unrelated to his case supplement a line of law that supports his client’s position. In Jevne v. Superior Court (JB Oxford Holdings), No. S121532 (Calif.), decided in May, and Credit Suisse First Boston Corp. v. Grunwald, No. 03-15695 (9th Cir.), decided in March, the courts held that California arbitration rules are pre-empted by the federal Securities Exchange Act of 1934 and rules promulgated under that act by the NASD. NASD spokesman Thomas E. Holloman said the NASD will not comment while the matter is before the SEC. The SEC has denied a hearing in Quattrone’s disciplinary action challenge, and a decision is expected at any time. John C. Coffee Jr., a Columbia Law School professor, said there is merit in Quattrone’s argument that NASD was acting as an agent in a criminal investigation, but that the SEC “is not about to say” that NASD or NYSE members can take the Fifth Amendment before those bodies. Quattrone’s argument will not “be given a serious hearing before it gets to the appeals court,” he said. Quattrone is currently appealing federal criminal convictions in New York in May 2004 for obstruction of justice, obstruction of agency proceedings and witness tampering in connection with his December 2000 direction to Credit Suisse employees to destroy documents subpoenaed by a federal grand jury and the SEC. No. 03CR582 (S.D.N.Y.).

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