For the second time in nine months, NASD has filed a complaint against Oppenheimer & Co., for obstructing an investigation, this time charging the firm and its chief executive officer, Albert G. Lowenthal, with repeatedly providing NASD with such flawed mutual fund data that the self-regulatory organization could not gauge its compliance with requirements to provide customers with so-called breakpoint discounts.
The earlier complaint, which was filed against the firm in May and is still pending, charged the firm with thwarting an investigation of its filings of municipal bond trading data by refusing to provide the NASD with requested information and by submitting other requested data late. NASD said the firm also failed to retain and preserve electronic communications between its employees.
Separately, Oppenheimer — one of the largest broker dealers in the U.S. and a wholly owned subsidiary of Toronto based-Oppenheimer Holdings Inc. and is not related to OppenheimerFunds — agreed to be censured and to pay $250,000 to settle NASD charges that it made at least 230 late disclosures of information about its broker-dealers that were required to be reported on registration and termination forms, including customer complaints, regulatory actions, investigations and terminations.
Barry Goldsmith, NASD executive vice president and head of enforcement, said yesterday that the regulatory organization’s most recent complaint against the firm is “especially troubling.”
“All regulated firms have a fundamental obligation to cooperate with NASD requests for information by providing complete and accurate and responsive data in a time manner,” Goldsmith said. “The ability of NASD and other securities regulators to protect investors and police the markets depends upon compliance with that obligation. Today’s matter is especially troubling not only because of the firm’s repeated lack of cooperation with NASD, but more significantly, because, as stated in the complaint, the CEO himself allegedly directed the firm to provide NASD with information that he knew to be inaccurate.”
Jim Shorris, NASD senior vice president and deputy enforcement director, said yesterday that the organization filing a complaint against a CEO is “pretty rare” and that it’s also unusual for there to be two pending complaints against one firm. He said incidents like this could hurt the industry.
“This involves self-assessments, which we think are a very important tool that benefits both NASD and the firms,” Shorris said. But this kind of case, involving the submission of flawed data, “endangers the program going forward” and, “as a result, we think it’s very important to pursue these matters aggressively.”
Oppenheimer indicated in a written statement yesterday that it was surprised by the NASD complaint. The firm said that it and Lowenthal “believe that they have strong defenses” against NASD’s disciplinary action and that they “intend to vigorously defend” themselves. The firm also said the NASD complaint “does not fairly reflect the operative facts and the sworn testimony already given in this matter.”
The complaint, which NASD’s enforcement department filed with the NASD’s Office of Hearing Officers yesterday, stems from a March 2003 report that NASD jointly issued with other securities regulators showing that nearly one in three transactions involving front-end load muni bond and other mutual fund shares that appeared eligible for a breakpoint discount did not receive one.
Typically breakpoint discounts are applied to front-end load Class A share transactions to reduce sales loads at the investment levels of $50,000, $100,000, $250,000 and $1.0 million, according to NASD. Class B and Class C share transactions, which usually do not include front-end sales charges, are not subject to breakpoint discounts.
As a result of its report’s findings, NASD required about 2,000 broker-dealers that sold front-end mutual funds during 2001 and 2002, including Oppenheimer, to conduct a self assessment of their compliance with breakpoint discount requirements and to report the results to NASD. The self-regulatory organization required Oppenheimer to sample 800 of its front-end Class A share transactions executed between Jan. 1, 2001 and Dec. 31, 2002 and report the findings to it by June 13, 2003.
About three days before the findings were due, Lowenthal learned that the firm’s 800-transaction sample included Class B and Class C as well as Class A share transactions and therefore was diluted. Nevertheless, Lowenthal ordered the flawed data be sent to NASD. He did not advise NASD of the flaws or ask anyone else at the firm to do so, according to NASD.
NASD discovered the problems with the data and on June 13 directed the firm to re-do its self-assessment with new data. Lowenthal assigned the same senior officer to prepare the second set of data and that data, submitted more than five months after the first, contained many of the same deficiencies, NASD said. “To date, now more than two and one-half years after the initial self assessment was due, the complaint alleges that neither the firm nor Lowenthal has submitted to NASD a complete and accurate self-assessment,” the NASD said.
“Oppenheimer’s self-assessment submissions so completely and fundamentally failed to comply with NASD’s … request that NASD could not rely on or use the firm’s data for purposes of analyzing the firm’s breakpoint compliance in both absolute terms, and in relation to the approximately 2,000 other member firms that contemporaneously submitted breakpoint self-assessments,” NASD said.
The complaint asks the NASD Office of Hearing Officers to find that the firm and Lowenthal violated NASD rules and to impose sanctions, “deemed fair and appropriate” or “fitting” on them. The sanctions are not further specified. Either party can appeal the office’s decision to NASD’s National Adjudicatory Council. The NAC’s decision can be appealed to the Securities and Exchange Commission. And the SEC ruling can be appealed to a federal court, NASD sources said.
The complaint follows an earlier one in which NASD charged that Oppenheimer impeded its investigation of muni bond trade reporting data in two ways.
First the firm refused to respond to a September 2004 request that the organization made for information relating to the e-mails of 20 employees who traded muni securities that the self-regulatory organization believed was critical to its investigation. Second, the firm was more than a year late in responding to an August 2003 request by NASD for trade confirmations for some of the bond trades it was investigating. In addition, the firm failed, from July 1, 2003 through the first quarter of 2004 to retain and preserve electronic communications between its employees and instead allow them to delete e-mails.
