NASD REGULATION, INC.
OFFICE OF HEARING OFFICERS
DEPARTMENT OF ENFORCEMENT,
Complainant,
v.
RICHARD F. DAMBAKLY
(CRD #2397176)
10 Shore Boulevard
Brooklyn, New York 11235,
Respondent.
Disciplinary Proceeding No. C3A980077
Hearing Officer?Andrew H. Perkins
Hearing Panel Decision
September 17, 1999
Digest
The Department of Enforcement filed a Complaint alleging that Respondent
Richard F. Dambakly violated NASD Rules 2110 and 3040 by participating in the
issuance of four promissory notes without giving his employers prior written
notification. Dambakly filed an Answer denying the charge. Prior to the hearing,
the Hearing Panel granted Enforcement?s motion for summary disposition on the
issue of liability and deferred making a finding on sanctions. Following the
hearing, the Hearing Panel determined that Dambakly should be fined $25,000,
barred in his capacity as a principal, and suspended for one year from associating
with any NASD member firm in any capacity. The Hearing Panel also ordered
Dambakly to pay costs in the amount of $2,479.25.
Appearances
Roger D. Hogoboom, Jr., Regional Counsel, Denver, Colorado, and Rory C.
Flynn, Chief Litigation Counsel, Washington, DC, counsel for the Department of
Enforcement.
Leonard C. Aloi, Bronx, New York, counsel for Richard F. Dambakly.
I. Introduction
Enforcement charged Richard F. Dambakly (Dambakly) with violation of NASD
Conduct Rules 2110 and 3040, which prohibit associated persons from engaging
in private securities transactions without first giving their employer prior written
notice of the proposed transaction. Specifically, the Complaint alleges that
Dambakly participated in the issuance of four promissory notes by Trigon
Corporation (Trigon)1 while he was associated with Paramount Investments
International, Inc. (Paramount), a member of the National Association of
Securities Dealers, Inc. (?NASD?), and that he did not give Paramount prior
written notice of his proposed participation in their issuance. The Complaint
further alleges that after the promissory notes were issued Dambakly left
Paramount and established a branch office of Paragon Capital Corporation
(?Paragon?), an NASD member, where he used the proceeds from the loans to pay
the branch office?s operating expenses. The Complaint also alleges that Dambakly
failed to give Paragon written notice of the loans.
Enforcement contended that, under Rule 3040, Dambakly was obligated to give
both Paramount and Paragon notice of these loans. The Hearing Panel, however,
rejected Enforcement?s theory that Dambakly was required to give Paragon
written notice of the receipt of each loan installment. The Hearing Panel
concluded that Dambakly?s violation of Conduct Rule 3040 was complete when
he failed to notify Paramount of the proposed transactions. Therefore, Dambakly
did not commit separate violations of Conduct Rule 3040 by not providing
Paragon with written notice of his receipt of each loan installment. Instead, the
Hearing Panel considered the circumstances surrounding Dambakly?s financing of
the Paragon branch office as aggravating factors bearing on the issue of
sanctions.2
II. Procedural Background
On December 11, 1998, Enforcement filed the Complaint in this disciplinary
proceeding. Dambakly failed to answer within the time permitted under Rule
9215(f) of the Code of Procedure, and the Hearing Officer issued an order setting
a deadline for Enforcement to file for entry of a Default Decision. Dambakly
responded to this order and requested leave to file a late answer. The Hearing
Officer granted this request following a pre-hearing conference, and Dambakly
filed his Answer on March 25, 1999. In his Answer, Dambakly admitted that
Trigon issued four promissory notes on January 18, 1996, and that he signed each
of the notes as Trigon?s President. Dambakly further admitted that he used the
loan proceeds to pay the general operating and other expenses associated with
Paragon?s branch office. He generally denied the remaining allegations in the
Complaint.
On May 14, 1999, Enforcement moved for summary disposition. In support of its
motion, Enforcement filed a Statement Of Undisputed Facts, a Memorandum Of
Points And Authorities In Support Of Complainant?s Motion For Summary
Disposition, and the Declaration Of Donald Lopezi, the staff examiner for NASD
Regulation, Inc. (?NASDR?) who conducted the examination that led to the filing
of the Complaint. Enforcement also filed 21 exhibits with Lopezi?s declaration.
Dambakly opposed the motion by filing a document entitled ?Affirmation In
Opposition Cross Motion To Dismiss? signed by his attorney. The affirmation did
not identify any genuine disputed material issues of fact, and the Hearing Panel
therefore granted the motion on the issue of liability and continued the case for a
hearing on the issue of sanctions. (Order Granting Partial Summary Disposition In
Favor Of The Department Of Enforcement And Continuing This Proceeding For
Hearing On Sanctions, June 23, 1999.)
A hearing was held in New York City on July 8, 1999, before a panel composed
of the Hearing Officer and two current members from the District 10 Committee
of the NASD. Enforcement called two witnesses to testify and introduced into
evidence the 21 exhibits it had submitted with its motion for summary
disposition.3 Dambakly testified on his own behalf, but he did not offer any other
evidence.
III. Findings of Fact
A. Dambakly?s Background and Association with Paramount
Dambakly entered the securities industry in June 1993 when he joined A.S.
Goldman & Co., Inc. He worked there and later at Joseph Stevens & Company as
a General Securities Representative before joining A.T. Brod & Co., Inc. (?Brod?)
in December 1994. (Ex. C1.) Dambakly worked for Brod until it closed in or
about March 1995. (Tr. 128.) Shortly after Brod closed, the President of
Paramount, Terrence Butler, approached Dambakly and asked if he would come
to work at Paramount. Dambakly agreed, and he joined Paramount as a General
Securities Representative in April 1995. (Ex. C1.)
Paramount hired Dambakly to run a new branch office in New York. However,
for the first six months, Dambakly worked in Denver, Colorado. (Tr. 130.) While
he was there, Paramount opened an office at 120 Wall Street, New York, New
York, and Dambakly transferred to that office in late 1995. (Tr. 131.)
When Mr. Butler opened the Paramount branch office at 120 Wall Street, he put
the lease in Trigon?s name. Mr. Butler had established Trigon as the operating
company for the new office. Its purpose was to own the assets, including the lease,
and pay the operating expenses for the branch office at 120 Wall Street. (Tr. 185.)
Trigon had no other assets or operations, and it was not a registered broker-dealer.
Mr. Butler was Trigon?s President, and he owned 75% of the company. Dambakly
was a Vice President, and he owned the remaining 25%. (Tr. 209.)
1. Dambakly?s Association with Paramount
Dambakly managed the 120 Wall Street Office from in or about October 1995
until January 1996. During that time, it appears that the office operated normally.
Dambakly testified that the 120 Wall Street Office conducted ?business as usual?
in December 1995. (Tr. 201.) But shortly after the New Year, Dambakly
discovered that they could not call in a trade because the firm was shut down due
to regulatory problems. (Tr. 134, 169, 172, 203.) Although Dambakly vacillated
on the exact date Paramount closed?and Enforcement did not know the date?
the evidence overall supports the Hearing Panel?s conclusion that Paramount
ceased operations during the first week of January 1996. (Tr. 169, 203.)
Paramount?s failure surprised and upset Dambakly because Mr. Butler had given
him no indication that the firm was in jeopardy. (Tr. 201.) In fact, Mr. Butler had
always assured Dambakly that Paramount was adequately capitalized and that it
was going to grow. (Tr. 183-84.) Thus, upon learning that he could no longer
place trades, Dambakly immediately flew out to Denver to confront Mr. Butler.
Dambakly?s testimony concerning his confrontation with Mr. Butler is conflicting.
On the one hand, Dambakly testified that Mr. Butler was ?not in Denver, [he was]
nowhere in sight.? (Tr. 218.) Indeed, Dambakly described Paramount?s offices as
being in total disarray when he arrived. People were leaving the firm and papers
were strewn about. (Tr. 170.) On the other hand, he testified that he confronted
Mr. Butler and that they had a ?falling out.? (Tr. 133, 184.) But Dambakly further
testified that he was not in a position to confront Mr. Butler because Dambakly
wanted to get the lease for the 120 Wall Street Office so that he could continue in
business with another broker-dealer. (Tr. 168, 184.) In his words, he had to ?put
his tail between his legs? rather than alienate Mr. Butler. (Tr. 184.)
Dambakly also testified that he resigned from Paramount during his trip to
Denver. However, the evidence regarding Dambakly?s resignation is equally
contradictory. Dambakly testified that he delivered a written letter of resignation
when he went to Paramount?s Denver office, but he had no record of the letter.
(Tr. 167-70, 201.) He also failed to produce any other corroborating evidence of
his claimed resignation. (Tr. 169.) Rather, all of the credible evidence indicates
that he remained associated with Paramount until February 1996.
On March 11, 1996, Dambakly filled out and signed a Uniform Application For
Securities Industry Registration Or Transfer (Form U-4) in which he represented
that he was associated with Paramount until February 1996. (Ex. C2.) In addition,
the Uniform Termination Notice For Securities Industry Registration (Form U-5)
filed on his behalf by Paramount on March 5, 1996, reflects that he was associated
with Paramount until February 1996. (Ex. C1, at 12.) When asked about the
discrepancy between his testimony that he left Paramount in January and the
forms indicating that he remained with Paramount until February, Dambakly
could only suggest that it resulted from Paramount?s disarray. (Tr. 170.) But
Paramount had no involvement in completing the Form U-4. Dambakly filled it
out himself by hand.
In summary, the Hearing Panel finds Dambakly?s conflicting account of his
actions in early January 1996 to be unreliable and contradicted by other reliable
evidence in the record. Accordingly, from the credible evidence, the Hearing
Panel concludes that Paramount was an NASD member until at least early March
1996, and Dambakly was associated with Paramount until February 1996, as
reflected on his hand-written Form U-4.
B. Dambakly?s Financing and Operation of the 120 Wall Street Office
To continue in the securities business at the 120 Wall Street Office, Dambakly
had to do three things: (1) acquire Trigon, which owned the office lease and
equipment; (2) obtain financing; and (3) associate with another broker-dealer.
1. Dambakly?s Agreement to Acquire Trigon
Sometime in the first two weeks of January 1996, Mr. Butler telephoned
Dambakly, and they worked out an agreement by which Dambakly would
purchase Mr. Butler?s interest in Trigon for $50,000. (Tr. 135, 187-88, 218-19.)
Under the agreement, Dambakly was obligated to pay Mr. Butler a down payment
of $25,000 (Tr. 219), but to do so he needed to obtain a loan.
2. Dambakly?s Financing for the 120 Wall Street Office
Dambakly secured financing through John Chapman. Dambakly had met Mr.
Chapman briefly at a Paramount office Christmas party in December 1995 at
which Mr. Butler introduced Mr. Chapman as an investment banker or venture
capitalist. (Tr. 133, 154-55.) Although Mr. Chapman and Dambakly had no other
contact, according to Dambakly, Mr. Chapman called him ?out of the clear blue?
in early January 1996 and asked Dambakly how he was doing. (Tr. 173-74.)
Dambakly told Mr. Chapman that his office was closed and that he would like to
get it up and running again, but he did not have the necessary capital. (Id.)
Dambakly also told Mr. Chapman that Mr. Butler had the office lease and that he
was demanding to be paid to let Dambakly take it over. Mr. Chapman then said
that he had a venture capitalist that could help. (Tr. 174.) Mr. Chapman did not
supply any details, and Dambakly did not ask any questions. (Tr. 175.) Dambakly
understood, however, that Mr. Chapman did not intend to invest any of his own
money. (Tr. 178.)
Without further discussion, Mr. Chapman arranged a $400,000 loan, evidenced by
four promissory notes of $100,000 each. (Ex. C4.) Except for the lenders, the four
promissory notes are identical. Trigon is the borrower, and each has a two year
term and bears interest at the rate of 18% per year. In addition, the notes grant the
lenders a security interest in Trigon.
The lenders on three of the promissory notes are offshore corporations. Premier
Sales Corporation, Ltd. and The China Connection, Ltd. are incorporated in the
Isle of Man, and Consolidated Euro Holdings, Ltd. is incorporated in the West
Indies. The fourth lender, Oxford Consulting, Inc., is a Nevada corporation.
Dambakly had no prior dealings with any of these corporations, and he did not
know the identity of any of their principals. (Tr. 156.)
The promissory notes were prepared by an attorney in Utah retained by Mr.
Chapman. On or about January 18, 1996, the attorney brought the notes to New
York for Dambakly?s signature. (Tr. 113, 143, 175.) Although Dambakly had not
discussed the terms of the promissory notes before the attorney arrived, Dambakly
asked few questions. Dambakly admitted that he was desperate, and he considered
the terms of the notes to be non-negotiable. (Tr. 182.) Consequently, he signed the
promissory notes on Trigon?s behalf without any change.
Dambakly admits that he did not give Paramount written notices of his
involvement in the issuance of any of these promissory notes. (Tr. 149.)
3. Dambakly?s Association with Paragon and Application of the Loan
Proceeds
Dambakly spent his time between January and March 1996 looking for a firm
with which to associate. His goal was to retain the existing staff and reopen as a
branch office of another firm. Dambakly testified that during this time all of the
20 to 25 brokers at the 120 Wall Street Office came in each day but did not
conduct any securities business. (Tr. 134, 212.) Dambakly claimed that all he and
his brokers could do was call their clients and tell them to sit tight until they
associated with a new firm. (Tr. 214.) According to Dambakly, their accounts had
been taken over by Hanifen, Imhoff, Inc., Paramount?s clearing firm. (Tr. 212-14.)
By early March 1996, Dambakly was close to closing on a deal to associate with
SunPoint Securities when Richard O?Reilly, a principal at Paragon, solicited
Dambakly to join Paragon. (Tr. 136-37, 228.) Dambakly suggested that he would
be interested in Paragon if he would be permitted to establish and manage an
Office of Supervisory Jurisdiction (?OSJ?). (Tr. 138.) Paragon accepted
Dambakly?s proposal and immediately had an Office Of Supervisory Jurisdiction
Agreement (?OSJ Agreement?) prepared. (Ex. C8.) Paragon rushed to bring
Dambakly and the other former Paramount brokers on board. It took Paragon less
than two weeks to work out the details and finalize the OSJ Agreement. During
this time, no one at Paragon asked Dambakly about his finances. (Tr. 44, 72, 74,
88.) Rather, Mr. Argenziano, Paragon?s Chief Financial Officer, concluded that
Dambakly was adequately capitalized because the office appeared to be fully
equipped. (Tr. 105.) Mr. Argenziano conducted no other financial due diligence
before signing the OSJ Agreement on March 15, 1996. (Tr. 86-88.) Mr.
Argenziano testified that he considered that the office could succeed based on the
brokers? anticipated production. (Tr. 88.)
Under the terms of the OSJ Agreement, Dambakly is obligated to pay all of the
expenses for the Paragon branch office at 120 Wall Street. Dambakly, however,
intended to pay these expenses through a third-party corporation much as
Paramount had done. He therefore formed Cyber National, Inc. (?Cyber
National?), a Nevada corporation, after discovering that Trigon was heavily
indebted. Accordingly, Mr. Argenziano required that Cyber National be a party to
the OSJ Agreement so that Paragon could audit its books. (Tr. 81.) As it turned
out, Dambakly used Trigon to pay the startup and operational expenses for the
office, and Cyber National remained a shell. (Tr. 149, 159.)
Trigon received a total of $387,000 in installments from the lenders Mr. Chapman
located. Except for the first installment, when Dambakly needed money, he
contacted Mr. Chapman and the funds were wired to Trigon?s account. The first
installment was advanced before the promissory notes were signed. Around the
first of January 1996, Mr. Chapman wired $25,000 directly to Mr. Butler in part
payment of the agreed purchase price for his interest in Trigon. (Tr. 136, 157.)
The remaining 20 installments totaling $362,000 were all made by wire transfer to
Trigon?s account at Marine Midland Bank between March 6 and September 13,
1996. (Ex. C6.) Most of these funds came from sources other than the lenders
named in the four promissory notes. One half of the transfers, totaling $240,000,
originated with Canaccord Capital Corp., a Canadian broker-dealer; three
originated with Union Securities, another Canadian broker-dealer; and one
originated with Alan M. Berkun, who at the time was the owner of Marlowe &
Company, a registered broker-dealer with the NASD.4 (Ex. C14, Ex. C18.) The
remaining transfers came from Oxford Consulting, one of the named lenders.
Enforcement traced the source of the funds from the two Canadian broker-dealers
and discovered that the funds originated from five accounts at those firms: East-
West Trading Corporation (?East-West?), Karston Electronics Limited
(?Karston?), Tamarisk Enterprises, Ltd. (?Tamarisk?), World Financial
Corporation (?World Financial?), and Lexington Sales Corporation Limited
(?Lexington?). (Ex. C14.) Each of these firms is also a foreign corporation.
Records obtained from the Vancouver Stock Exchange indicate that East-West
and Karston are owned by Gordon Heywood, a resident of the United Kingdom.
East-West lists its principal place of business as Nevis, West Indies, and Karston
lists its principal place of business as Tortola, British Virgin Islands. (Ex. C15,
Ex. C16.) East-West had accounts at both Canaccord and Union Securities, and
Mr. Chapman is designated as their representative on the account information
forms. (Id.) Mr. Chapman had authority to trade in Karston?s account.
The next two companies, Tamarisk and World Financial, have a number of
common factors. Each has its principal place of business in the United Kingdom,
and the Secretary of Tamarisk is the President of World Financial. (Ex. C16, at
62.) Also, Alan Wolfson set up their accounts at Canaccord. (Ex. C16, at 62, 84.)
Mr. Wolfson was a stock promoter who, in October 1996, was charged jointly
with Mr. Chapman by the Securities and Exchange Commission in an
administrative proceeding with violating the securities laws. (Tr. 145-46; Ex.
C18.)
The final account that lent money to Trigon is Lexington, which has its principal
place of business in the Isle of Man. The account documentation shows that Mr.
Chapman was designated to receive the account statements and that he had trading
authority in the account. (Ex. C16, at 146.)
A Field Supervisor with NASDR testified that he gathered the foregoing
information about the persons lending money to Trigon because NASDR staff had
detected an overlap between the securities Dambakly was trading at Paragon and
the securities listed on the account statements for four account holders at
Canaccord. (Tr. 115-16.) Many of the securities those companies invested in were
securities that Dambakly and his brokers were trading at Paragon. Moreover, the
NASDR staff learned that Dambakly and Paragon had entered into an
arrangement with Cyber America, a company Mr. Wolfson was promoting. (Tr.
146, 237-38.) However, no direct evidence of wrongdoing was uncovered in this
portion of the investigation. (Tr. 116.)
In or about October 1996, the NASD requested Dambakly to supply information
about, among other matters, any private securities transactions he had engaged in
since January 1995. (Ex. C5.) Mr. Argenziano reviewed Dambakly?s response
before it went to the NASD, at which point he claims that he discovered that
Dambakly had borrowed money from non-family members to finance the
operations of the 120 Wall Street branch office.5 Mr. Argenziano testified that as
a result of this discovery he called Dambakly into his office for questioning. When
Dambakly told Mr. Argenziano about the four promissory notes, Mr. Argenziano
terminated the OSJ Agreement and closed the 120 Wall Street office on
November 11, 1996. (Tr. 33-34; Ex. C12, at 1.)
Dambakly partially disputes Mr. Argenziano?s testimony. Dambakly contends that
he informed officials at Paragon about his loans right from the start. Dambakly
also claims that at the time he signed the OSJ Agreement he told Alex
Cherepakhov, the manager at Paragon, about the loans. (Tr. 144, 237.)
Nevertheless, Dambakly concedes that he did not notify Paragon about his
participation in the issuance of the four Trigon promissory notes, the identity of
the lenders, or his use of the loan proceeds to pay the operating expenses of the
120 Wall Street Office. (Tr. 149.)
The Hearing Panel finds that Dambakly did not disclose the loans or his receipt of
the loan proceeds to Paragon before he was questioned in November 1996.
IV. Conclusions of Law
A. Jurisdiction
The NASD has jurisdiction over Dambakly and this proceeding. Dambakly was
registered with the NASD at the time of the alleged rule violations and at the time
Enforcement filed the Complaint. His registration with the NASD terminated on
December 23, 1998, and Enforcement filed the Complaint on December 11, 1998.
(Ex. C1, at 1.)
B. The Promissory Notes Are Securities
Conduct Rule 3040 prohibits any person associated with a member firm from
participating in any manner in a private securities transaction outside the regular
course of employment unless that person provides prior written notice to the
member ?describing in detail the proposed transaction and the person?s proposed
role therein and stating whether he has received or may receive compensation in
connection with the transaction.? Accordingly, the threshold question is whether
the four promissory notes are securities. For the reasons below, the Hearing Panel
concludes that they are.
Under the ?family resemblance? test adopted by the Supreme Court in Reves v.
Ernst & Young, 494 U.S. 56 (1990), a note is presumed to be a security as defined
in Section 3(a)(10) of the Securities Exchange Act of 1934, 15 U.S.C. õ
78c(a)(10), unless (1) it bears a strong resemblance to certain types of notes
recognized, based on four factors, as being outside the investment market
regulated under the securities laws, or (2) it should be added, based on a balancing
of the same four factors, to that list of excluded notes.6 The presumption is only
rebutted when this analysis leads to the conclusion that the note is not a security.7
?This reflects Congress?s intent to define the term ?security? with sufficient
breadth to encompass virtually any instrument that might be sold as an
investment.?8
The four Trigon notes do not resemble any of the certain types of commercial or
consumer notes that are excluded from the definition of a security. Trigon?s notes
were sold to members of the general public as investments.9 The notes? favorable
interest rate indicates that profit was the lenders? primary objective.10
The remaining factors in Reves also indicate that the Trigon notes are securities
and that they should not be added to the list of instruments excluded from
coverage by the securities laws.11 First, the plan of distribution extended beyond
the immediate lenders. Several others invested through Canadian broker-dealers.
Second, the manner in which the investors were approached on Trigon?s behalf
indicate that the investors would expect that the notes were investments.12 All of
the investors were located by broker-dealers or investment advisors, and none of
the investors knew Dambakly. Finally, the investments were not insured, and there
was no other factor present that reduced the investors? risk.13
C. Dambakly?s Violation Of Rules 2110 and 3040?Private Securities
Transactions
The Hearing Panel finds that Dambakly violated Rules 2110 and 3040 when he
failed to give Paramount notice of his proposed involvement in the issuance of the
four promissory notes on January 18, 1996. This violation is clearly established.
Dambakly participated in the sale of the four promissory notes issued by Trigon,
and he admits that he failed to give Paramount written notice prior to their
issuance.
Enforcement, however, contends that Dambakly also violated Rule 3040 by
failing to give Paragon written notice before he received the loan proceeds while
he was associated with Paragon. (Tr. 247-48.) In Enforcement?s view, the receipt
of the loan proceeds is inseparable from the original violation, and therefore each
time Dambakly received money under the promissory notes without giving
Paragon written notice of his participation in the transactions, he violated Conduct
Rule 3040. On the other hand, Enforcement concedes that Dambakly would not
have been obligated under Rule 3040 to give Paragon written notice of his
participation in the loans if the original issuance of the notes had not been in
violation of the Rule. (Tr. 248-49.) In other words, if Dambakly had given proper
notice to Paramount or had not been associated with a broker-dealer when the
notes were issued, he would not have been obligated to give Paragon written
notice of the loans and his receipt of the loan proceeds.
The Hearing Panel rejects Enforcement?s construction of Rule 3040. Not only has
Enforcement offered no authority to support its view, but such a construction
contradicts the plain language of the Rule. Conduct Rule 3040 requires that notice
of a proposed private securities transaction be given before the broker participates
in the transaction.14 The violation is complete when the broker participates in the
private securities transaction without having provided the required notice. The
offense centers on the requirement to provide notice, not the various acts
comprising the broker?s participation in the private securities transaction.
The purposes underlying the Rule also support the Hearing Panel?s conclusion.
The Rule is designed to protect the broker?s firm from ?exposure to loss and
litigation, and investors from the hazards of unmonitored sales.?15 By failing to
give written notice of the proposed private securities transaction investors are
?deprived of the brokerage firm?s oversight and supervision, a protection they
have a right to expect.?16 These prophylactic purposes are best achieved by
requiring notice before the broker participates in any manner in a proposed private
securities transaction.
V. Sanctions
For violations of Rule 3040, the applicable NASD Sanction Guideline
recommends a fine ranging from $5,000 to $50,000 and provides that
?Adjudicators may increase the recommended fine amount by adding the amount
of a respondent?s financial benefit.? The Guideline also recommends that the
Adjudicator consider suspending a respondent for up to two years, and, in
egregious cases, consider barring the respondent.17
In addition to the general factors that should be considered whenever imposing
sanctions,18 the Guideline directs Adjudicators to consider the following factors
for violations of Rule 3040: (1) whether the respondent had a proprietary or
beneficial interest in, or was affiliated with, the selling enterprise or issuer; (2)
whether respondent attempted to create the impression that the employer member
firm sanctioned the activity, for example, by using the employer?s premises,
facilities, name and/or goodwill for private transactions or by selling a product
similar to the products that the employer member firm sells; (3) whether the
selling away involved customers of the employer member firm; and (4) whether
the individual provided the employer with verbal notice of all relevant factors and,
if so, the firm?s verbal or written response, if any.
The Hearing Panel begins its analysis under the Guideline with the recognition
that failure to give notice of private securities transactions is a serious offense.
Investors are exposed to significant risk and loss where there is no oversight and
supervision, and the NASD loses its ability to regulate sales practices when
transactions are not disclosed. The Hearing Panel notes that the investors in this
case lost their entire investment, a total of $382,000. Furthermore, the Hearing
Panel finds that Dambakly had a proprietary or beneficial interest in Trigon, the
issuer of the promissory notes. These factors warrant serious sanctions.
There are also the following mitigating factors. The Hearing Panel finds that there
is no evidence that Dambakly attempted to create the impression that Paramount
or Paragon sanctioned the transactions, nor is there evidence that any of the
investors were Paramount or Paragon customers. In addition, Dambakly does not
have a disciplinary history. Moreover, the Hearing Panel finds that some of the
circumstances surrounding the issuance of the Trigon notes are mitigating. First,
Paramount was no longer operating at the time Trigon issued the promissory
notes. Thus, one of Rule 3040?s primary purposes?to protect the firm from
exposure to loss and litigation?is not implicated at the time the notes were
issued. Second, Mr. Butler, the President and owner of Paramount, knew about
the notes before they were issued. This is the equivalent of oral notice, a
mitigating factor under the Guideline.19 These factors would be substantially
mitigating in the usual case. However, the Hearing Panel cannot ignore
Dambakly?s conduct after he left Paramount. He secured this financing for the
express purpose of financing branch office operations at his next firm. Under
these circumstances, the Hearing Panel considers Dambakly?s failure to fully and
accurately disclose the existence of the loans, the source of the borrowed funds,
and Mr. Chapman?s involvement to Paragon to be aggravating factors that warrant
more than minimal sanctions. Although Dambakly?s conduct while he was
associated with Paragon did not violate Rule 3040 directly, his conduct raises
significant regulatory concern. By not disclosing the existence and details
concerning his operating loans, Dambakly insulated that aspect of Paragon?s
branch office from oversight by Paragon and the NASD.
Despite Paragon?s apparent lax supervision and Mr. Argenziano?s failure to make
reasonable inquiry about the finances for Paragon?s branch office at 120 Wall
Street, as the managing principal, Dambakly should have realized that his failure
to disclose the details concerning the financing violated the spirit of Rule 3040
and generally accepted standards of conduct regarding branch office operations.
Dambakly knew or should have known that Paragon would have a substantial
supervisory interest in knowing that he had developed a working relationship with
Mr. Chapman, a stock promoter or consultant who was involved with investing in
some of the same securities that were traded by the brokers under Dambakly?s
supervision. Dambakly also knew or should have known that it was important for
Paragon to know that at least one of the lenders, Mr. Berkun, was also a registered
person and that the lenders had a security interest in the assets tha |
