Peter Henning, Wayne State University Law School:

"Frank Quattrone, former star high tech investment banker at Credit Suisse First Boston (CSFB), was permanently barred from the securities industry and fined $30,000 by the NASD yesterday (Nov. 22).  Quattrone was convicted this past March of obstruction of justice in connection with an e-mail he forwarded to others in his group about cleaning up their files while the SEC was conducting an investigation of CSFB's activities in the IPO market, particularly those of Quattrone's high tech investment group.  He was sentenced to 18 months imprisonment, and is currently free on bail pending appeal.

The basis for the NASD's permanent bar is that Quattrone refused to testify on the record before an NASD hearing panel investigating his conduct.  Quattrone asserted his Fifth Amendment privilege, but the NASD refused to recognize such a right for a member of the securities industry subject to its regulations because the Fifth Amendment only applies to the government and not private organizations.  The NASD's news release states:

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.

NASD's NAC [National Adjudicatory Council] 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 original hearing panel recommended only a one-year bar, but the NAC increased that to a permanent bar because it found that Quattrone's conduct was "egregious."  Quattrone's attorney stated that he would appeal to the SEC.

The sanction against Quattrone highlights a problem for anyone working in an industry subject to self-regulation by a private body.  The NASD's regulations are subject to review and approval by the SEC, and its decisions are subject to SEC review, but courts have held consistently that it is a private body and therefore the Fifth Amendment privilege against self-incrimination does not apply to its proceedings (see, e.g. D.L. Cromwell Investments, Inc. v. NASD Regulation, Inc., 132 F.Supp.2d 248 (S.D.N.Y. 2001), aff'd 279 F.3d 155 (2d Cir. 2002)).  Our casebook (White Collar Crime: Law and Practice (2d ed.)) highlights the parallel proceeding problem that confronts every defendant whose conduct is subject to both criminal and civil regulation–which seems to be just about everyone these days.  Quattrone was called to testify while the grand jury was investigating his conduct, and almost every attorney would recommend that a client not testify while such an investigation was in progress, much less after an indictment is returned.  This is a true Hobson's choice, and one which does exact a penalty from the person who refuses to cooperate with an industry or licensing investigation." [November 23, 2004; White Collar Crime Prof Blog has the post]