SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 40654 / November 10, 1998 Admin. Proc. File No. 3-9549 ----------------------------------------------------------------- : In the Matter of the Application of : : Robert L. Wallace : 1819 Imperial Golf Course Boulevard : Naples, FL 34110 : : For Review of Disciplinary Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : : OPINION OF THE COMMISSION REGISTERED SECURITIES ASSOCIATION -- REVIEW OF DISCIPLINARY PROCEEDINGS Exaggerated and Misleading Advertisements Registered principal and representative of NASD member caused the distribution of exaggerated and misleading advertisements. Held, association's findings of violation and sanctions it imposed are sustained. APPEARANCES: Robert L. Wallace, pro se. Alden S. Adkins, Norman Sue, Jr., Susan L. Beesley, and Shirley H. Weiss, for NASD Regulation, Inc. Appeal filed: March 2, 1998 Last brief filed: May 22, 1998 I. Robert L. Wallace appeals from disciplinary action taken against him by the National Association of Securities Dealers, Inc. ("NASD"). The NASD found that Wallace was responsible for the publication of an advertisement that was misleading and contained exaggerated and unwarranted representations, in violation of Conduct Rules 2110 and 2210. [1] The NASD censured Wallace, fined him $5,000, and suspended him for 60 days from association with any member of the NASD in all capacities.[2] We base our findings on an independent review of the record. II. Wallace was a registered principal and representative with NASD member firm Securities America ("SA"). On Saturday, November 4, and Monday, November 6, 1995, the following advertisement ("Advertisement") was published in the Naples Daily News ("News"): Making a "Killing" in the Stock Market needn't mean "having to shoot your broker." Learn how you can realize up to 42% on your investment with no risk to principal. For information on the investment of the '90's, call: BOB WALLACE 435-9111. Securities offered thru Securities America - member NASD, SIPC. The Advertisement did not specifically identify the "investment of the '90's" for which it was offering information. In fact, the Advertisement was for financial instruments known as "viatical settlements." A viatical settlement is "an investment contract pursuant to which an investor acquires an interest in the life insurance policy of a terminally ill person." [3] The NASD learned about the Advertisement from NASD member firms in competition with SA and began an investigation. In late February 1996 the NASD requested from SA's compliance officer information regarding the nature of the product being offered in the Advertisement. Two months later, the compliance officer responded in writing that SA had not reviewed the Advertisement, that the firm had not approved the product itself, and that Wallace, the representative responsible for the publication of the Advertisement, had been terminated as a result of the unauthorized publication of the Advertisement. The compliance officer attached to his letter to the NASD a statement by Wallace asserting that the News had published the Advertisement by mistake. Wallace, however, did not complain to the News or SA that the News had published the Advertisement without his authorization until after the NASD began its investigation. In October 1996, the NASD issued a complaint alleging that Wallace violated Conduct Rules 2110 and 2210 by publishing the Advertisement. Subsequently, at the District Business Conduct Committee ("District Committee") hearing in this matter, Emilie Gehrke, a former advertising account representative for the News who handled Wallace's account with the News at the time the Advertisement was published, testified that Wallace had authorized her to publish the Advertisement. She testified that Wallace sent her a copy of the Advertisement via facsimile on November 1, 1995, and that Wallace contacted her by telephone and specifically asked that the News run the Advertisement on November 4 and 6. She further stated that Wallace called her in early 1996 and told her that "some people in his business" were concerned about the text of the Advertisement, and that, although they "both knew that this ad was approved to run," he needed her to get him "off the hook" by writing a letter stating that she had printed the Advertisement without his authorization. Gehrke refused to write any such letter on Wallace's behalf. Wallace testified before the District Committee that the News ran the Advertisement by mistake. According to Wallace, the Advertisement was one of four form advertisements that he received from the insurance company through which he planned to offer the viatical settlements. Wallace testified that he sent all four of these forms to Gehrke on November 1, 1995. Wallace asserted that these four advertisements were to be used by the News' art department to create "proofs," which he then planned to have approved by SA's compliance department before publication. Wallace also testified that he was not aware of the Advertisement's publication until he was contacted by SA's compliance department in early 1996. Wallace confirmed that he called Gehrke in early 1996, that he asked her to write a letter stating that she had run the Advertisement without his authorization, and that she refused to comply with his request. Wallace paid the November 1995 bill that he received from the News in early 1996. While Wallace acknowledges that he had paid the November bill, he testified that he typically paid his bills from the News without reviewing them carefully, and that once he discovered that the Advertisement had been run without his authorization, he refused to pay all subsequent bills. III. We find, as did the NASD, that Wallace authorized publication of the Advertisement. We find further that the Advertisement was misleading, contained exaggerated and unwarranted representations, and failed to disclose the risks associated with the product being advertised, in violation of Conduct Rules 2110 and 2210. Wallace Placed the Advertisement Gehrke testified that there was "no question in her mind" that Wallace authorized her to run the Advertisement on November 4 and 6, 1995. She added that, in a telephone conversation in early 1996, Wallace stated that they "both knew that this ad was approved to run." While Gehrke's testimony contrasts starkly with that of Wallace, the District Committee found that Gehrke was an "extremely credible" witness and concluded that Wallace had authorized publication of the Advertisement. Because the District Committee heard the testimony of both Gehrke and Wallace and observed their respective demeanors, its credibility determination deserves great weight. [4] We have no reason to question that determination here. We do not find persuasive Wallace's attempt, in his brief to us, to discredit Gehrke's testimony. As a part of this attempt, Wallace seeks to introduce (1) hearsay evidence that Gehrke has run unauthorized advertisements before and (2) evidence of 28 lawsuits against the parent company of the News, including one alleging that the News printed untrue statements. The reliability of this new evidence is questionable. Moreover, Section 452 of our Rules of Practice provides that a proponent seeking to adduce new evidence on appeal must show that the evidence is material and that reasonable grounds exist for his failure to present the evidence previously. Wallace has not even attempted to make such a showing here, and we decline to consider his proffered new evidence. Alternatively, Wallace seeks to exclude Gehrke's testimony because her name was not on the witness list sent him by the NASD prior to the hearing. The NASD does not dispute that Gehrke's name was not on the witness list that it transmitted to Wallace. Wallace claims additionally that the NASD never told him that it intended to call Gehrke as a witness at the District Committee hearing. [5] The record does not support his claim. The NASD regional attorney in this matter stated before the District Committee that Wallace called him two days prior to the hearing and inquired about the witnesses that the NASD intended to call and that during this telephone conversation he informed Wallace that Gehrke would testify. The District Committee credited the NASD attorney's testimony regarding the conversation over Wallace's testimony. As noted above, we tend to defer to a hearing panel's credibility determination and generally do not question such a determination without a good reason to do so. [6] We have been given no such reason here. In any event, the record reflects that Wallace had ample opportunity to examine Gehrke and, in fact, questioned her at length. Wallace has not proffered any testimony that he might have elicited from Gehrke had he had more opportunity to prepare for the cross-examination, nor has he shown how he was prejudiced by the NASD's asserted failure timely to identify Gehrke as a witness. [7] The Advertisement was Misleading Wallace advertised that an investor in the product offered could realize gains of up to 42% "with no risk to principal." Wallace asserts that this statement is true, because once the insured dies, as he or she inevitably will, the insurer is under a contractual obligation to pay out benefits to the purchaser of the viatical settlement contract. Although the Advertisement claims "no risk to principal," if the insurer is unwilling (e.g., on the basis of alleged fraud) or unable (e.g., because it is insolvent) to pay the claim made against the insurance policy that is the subject of the viatical settlement contract, the investor may lose some or all of his principal. In addition, while the Advertisement trumpets the potential profits to be made by buying the product offered, it fails to disclose the considerable risks attendant to investing in viatical settlements. [8] For instance, should the insured live longer than expected, the net present value of the consideration paid by the investor might well exceed the net present value of the proceeds paid upon the insured's death. By referring to "securities" and the "stock market," the Advertisement left the public with the impression that the product being sold was a listed security. In fact, the viatical settlements that Wallace offered were not listed on any market or exchange, and may not have been securities. [9] Investors in Wallace's viatical settlements thus would not benefit from the liquidity that a public listing provides and also might not receive the benefit of the protections of the federal securities laws and regulations. The Advertisement also stated that the product was being "offered thru Securities America - member NASD, SIPC," although SA had never approved the product or the Advertisement. Such representations falsely assured prospective investors that their purchases of the product would be subject to "the oversight and supervision by a brokerage firm that [persons investing through an NASD member firm] have the right to expect." [10] **FOOTNOTES** [1]: NASD Conduct Rule 2210(d) provides that no material fact or qualification may be omitted from any member communication with the public "if the omission, in the light of the context of the material presented, would cause the advertising or sales literature to be misleading," and prohibits "exaggerated, unwarranted, or misleading statements or claims" in all public communications. NASD Conduct Rule 2110 provides that members shall "observe high standards of commercial honor and just and equitable principles of trade." [2]:The NASD also assessed costs. [3]:SEC v. Life Partners, Inc., 87 F.3d 536, 537; reh'g denied, 102 F.3d 587 (D.C. Cir. 1996). [4]:See, e.g., Charles E. French, Exchange Act Release No. 37409 (July 8, 1996), 62 SEC Docket 828, 833-34 and n.16; Gary Roth, Exchange Act Release No. 37221 (May 16, 1996), 61 SEC Docket 2781, 2785 and n.6. [5]:The NASD "shall upon request make available to respondents . . . the names of any witnesses the staff intends to present at the hearing no later than five (5) business days before the hearing." NASD Procedural Rule 9224(a). Although Wallace did not request the list, the NASD took it upon itself to provide him with one. That any list provided should be accurate is axiomatic; our disposition of Wallace's claim here should not be read to suggest otherwise. [6]:See supra n.4 and accompanying text. [7]:See Kim G. Girdner, 50 S.E.C. 221, 227 (1990) (NASD's failure to identify two witnesses not prejudicial where the respondent "vigorously cross-examined" the witnesses and did not identify "any testimony he might have elicited from [the] witnesses if he had had more of an opportunity to prepare for their cross-examination"). [8]:See Jay Michael Fertman, 51 S.E.C. 943, 950 (1994) (sales literature must "disclose in a balanced way the risks and rewards of the touted investments"). [9]:After publication of the Advertisement, the Court of Appeals for the District of Columbia Circuit held that certain viatical settlement contracts before it were not securities under the federal securities laws. See SEC v. Life Partners, Inc., 87 F.3d 536, reh'g denied, 102 F.3d 587 (D.C. Cir. 1996). [10]:Cf. Darrell Jay Williams, 50 S.E.C. 1070, 1073 (1992) (concerning a registered representative of an NASD member firm who engaged in a private securities transaction without notifying his employer). IV. Wallace asserts that viatical settlements are "an insurance product," not securities, and that "the NASD has no business trying to regulate an insurance product." He bases this argument on SEC v. Life Partners, Inc., [11] which concluded that certain viatical settlement contracts are not securities under the federal securities laws. Here, the particular characteristics of the viatical settlements being offered by Wallace are not evident from the record, and thus we cannot reach a conclusion about their status under the federal securities laws. In reviewing this disciplinary proceeding, we need not determine whether the viatical settlements Wallace offered were securities. The NASD is not seeking here to regulate the particular product being offered by Wallace, but to regulate Wallace's dealings with the investing public. By registering as a representative and a principal of an NASD member firm, Wallace agreed to abide by the NASD's rules. The rules under which Wallace has been charged are not limited to advertisements for securities, but provide standards applicable to all NASD member communications with the public. [12] Registered representatives and principals must comply with these standards when they offer financial advice and sell financial instruments to the public through newspaper advertisements. Based on the foregoing analysis, we sustain the NASD's findings of violation. V. Wallace asserts that the sanctions imposed by the NASD are "extremely harsh and do not fit the nature of this situation." We may cancel, reduce or require remission of a sanction imposed by the NASD where we find, having due regard for the public interest and the protection of investors, that the NASD's sanction is excessive or oppressive or imposes an unnecessary or inappropriate burden on competition.[13] Here, we make no such finding. Wallace claims that the sanctions are excessive given that his publication of the Advertisement did not cause harm to any member of the public. The District Committee, however, already considered this argument in determining its sanction of Wallace, explicitly recognizing as a mitigating circumstance the fact that Wallace's wrongdoing resulted in "no demonstrable harm to any customers." [14] Wallace also argues that the fine imposed is too severe because he already has suffered financial loss as a result of the publication of the Advertisement. Securities America terminated Wallace as a principal because of his unauthorized publication of the Advertisement, and Wallace states that he has been unable to find satisfactory employment. Financial loss to a wrongdoer as a result of his wrongdoing does not, however, serve to mitigate the gravity of his conduct. [15] That Wallace's employer responded to his misconduct, independent of this NASD proceeding, is not relevant to our review of the NASD's sanctions here. Moreover, Wallace has a history of prior similar misconduct. In 1994 the NASD found that he had disseminated misleading sales literature, thereby violating Article III, Sections 1 and 35 of the NASD's Rules of Fair Practice, the predecessor rules to Conduct Rules 2110 and 2210. For that misconduct the NASD fined Wallace $3,000 and ordered that he disgorge $423 in commissions. The rules that Wallace violated provide important safeguards for the protection of public investors. The sanctions imposed by the NASD are well within the range recommended in the applicable **FOOTNOTES** [11]:See supra nn.3 and 9 and accompanying text. [12]:NASD Conduct Rule 2210(d) provides that "all member communications with the public shall be based on principles of fair dealing and good faith," and that "exaggerated, unwarranted or misleading statements or claims are prohibited in all public communications of members" (emphasis added). [13]:Exchange Act 19(e)(2), 15 U.S.C. 78s(e)(2) (1997). [14]:The National Business Conduct Committee subsequently reduced the sanctions imposed by the District Committee by eliminating the five-year bar as a securities principal the District Committee also had imposed. [15]:Indeed, the NASD's Sanction Guidelines do not list financial loss to the wrongdoer as one of the "principal considerations in determining sanctions." See NASD Sanction Guidelines (1996 ed.) at 5. guidelines for the publication of misleading advertisements. [16] We do not find that these sanctions are excessive, oppressive, or unduly burdensome. We accordingly sustain them. An appropriate order will issue. [17] By the Commission (Chairman LEVITT and Commissioners HUNT and CAREY); Commissioners JOHNSON and UNGER not participating. Jonathan G. Katz Secretary **FOOTNOTES** [16]:See id. [17]:We have considered all of the arguments advanced by the parties. They are rejected or sustained to the extent that they are inconsistent or in accord with the views expressed herein. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 40654 / November 10, 1998 Admin. Proc. File No. 3-9549 ----------------------------------------------------------------- : In the Matter of the Application of : : Robert L. Wallace : 1819 Imperial Golf Course Boulevard : Naples, FL 34110 : : For Review of Disciplinary Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : : ORDER SUSTAINING DISCIPLINARY ACTION TAKEN BY REGISTERED SECURITIES ASSOCIATION On the basis of the Commission's opinion issued this day, it is ORDERED that the disciplinary action taken by the National Association of Securities Dealers, Inc. against Robert L. Wallace be, and it hereby is, sustained. By the Commission. Jonathan G. Katz Secretary