CFTC Docket No. CRAA-98-6


Our review of the record and the parties' appellate submissions establishes that the findings and conclusions of the National Futures Association ("NFA") are supported by the weight of the evidence; we therefore adopt them. We further conclude that the NFA committed no error material to the outcome of this proceeding and that the parties generally have not raised important questions of law or policy that merit extended discussion. Accordingly, we affirm the NFA decision.

The NFA revoked the registration of Robert J. Pelaez ("Pelaez") as an associated person pursuant to Section 8a(3)(J) of the Commodity Exchange Act, 7 USC 12a(3)(J) (1994).1 The NFA Membership Committee found that Pelaez's permanent bar from association with any member of the NASD is a statutory disqualification under Section 8a(3)(J).

Pelaez argues on appeal that the NFA erred by failing to allow him to introduce meaningful evidence of mitigation. App. Br. at 19. Pelaez contends that he was "virtually completely barred from the outset of the [NFA] proceeding from exploring or introducing any facts relevant to the degree and extent of his participation in the offending conduct." Id. at 20. Our review of the record reveals, however, that the NFA appropriately refused to allow Pelaez to relitigate the findings of the NASD.

The facts underlying Pelaez's misconduct are straightforward. World Capital Growth Corp., a securities broker-dealer of which Pelaez was a principal, overstated its capital in filings with the NASD and submitted fraudulent documents to support the misstatement.2 The NASD brought a disciplinary action after a member of the firm brought the false filings to its attention. The DBCC found Pelaez liable, but concluded that several factors mitigated the wrongdoing. Accordingly, the DBCC imposed on Pelaez and his co-respondents a fine of $50,000 (jointly and severally) and a three-year suspension from associating with any member of the NASD in any capacity. DBCC Decision, slip op. at 7.

Shortly thereafter, the NASD's National Business Conduct Committee took sua sponte review of the case. The NBCC rejected the lower panel's findings of mitigation, and permanently barred Pelaez from associating with a member of the NASD in any capacity, effectively barring him from the securities industry. In addition, the NBCC increased the fine imposed by the DBCC based on its finding that each of the four causes alleged in the complaint constituted a separate and distinct violation subject to separate monetary sanctions. NBCC Decision, slip op. at 6. Pelaez was fined $10,000 for causes one through three of the complaint and $50,000 for cause four and was assessed $1,290.75 in costs imposed by the DBCC. Id. at 7. With regard to Pelaez's misconduct, the NBCC stated that:

It is undisputed that both George and Robert Pelaez knew that false documents had been submitted to the NASD and that they did not take any steps to advise . . . NASD of this fact. . . . Moreover, although the record is unclear as to whether Robert Pelaez knew about the fake $40,000 wire confirmation at the time it was submitted or sometime shortly thereafter, we agree with the DBCC that the more important fact is that when he learned of it, he failed to advise the NASD.

Id. at 5. Pursuant to Section 8a(3)(J) of the Act, the NFA instituted its statutory disqualification action based on the NASD bar.

The facts leading to the NASD bar were relevant in the NFA proceeding only on the issue of mitigation. Generally, a respondent's opportunity to show that the circumstances of his misconduct mitigate its gravity is not an invitation to relitigate those underlying facts. Pelaez was advised of this principle prior to the NFA hearing. See Letter from NFA Attorney Patricia C. Donahue to Pelaez's attorney, Jeffry Henderson (June 2, 1998).

We have examined the transcript, particularly those portions that Pelaez cites in support of his argument. The transcript reveals that Pelaez raised in mitigation some of the same arguments raised in the NASD proceeding-specifically, that he did not actually prepare or submit false documents. His lawyer stressed these points in his opening and closing arguments in the NFA proceeding and attempted to elicit direct testimony from Pelaez to that effect. Tr. at 10, 211. The NFA's attorney objected to the line of questioning, stating that, "[w]e will stipulate that there was no finding that he actually cut and pasted documents." Tr. at 170.

In its decision, the NFA, citing Commission authority, ruled that the obligation to allow registrants to explore factual issues relevant to the gravity of their conduct did not foreclose the NFA from applying collateral estoppel to preclude relitigation of issues that were fully litigated in the previous decision. Final Order Revoking Registration, slip op. at 13 (Sept. 8, 1998), citing In re Lama, [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) 24,294 at 35,286 (CFTC Aug. 2, 1988). The NFA then expressly stated that Pelaez was collaterally estopped from relitigating before the NFA the NASD's finding that Pelaez knew World Capital had sent falsified documents but failed to notify the NASD. Id. at 14. The NFA also noted that the NASD "did not go so far as to find Pelaez guilty of the falsification itself." Id. at 13, citing In re Clark, [1996-1998 Transfer Binder] Comm. Fut. L. Rep. (CCH) 27,032 at 44,929 (CFTC Apr. 22, 1997) (collateral estoppel may be applied to facts found in a self-regulatory organization proceeding).

Under these circumstances, collateral estoppel was appropriately applied, the relevant facts having been exhaustively litigated before the NASD. In any event, we see no basis for Pelaez's assertions of harm since his limited participation in the false documents scheme was brought to the NFA's attention and was duly considered. Every forum in which Pelaez has appeared was fully aware that he did not, in the words of the NFA's attorney, "cut and paste documents." However, we find, as did the NASD and the NFA, that that circumstance lacks mitigating weight. We concur with the statement of Pelaez's own attorney in his closing argument: "We readily acknowledge that there isn't a whole lot of mitigation in this case . . . ." Tr. at 211.

As a separate issue related to mitigation, Pelaez asks us to reopen the record to admit additional evidence; specifically, the transcript of his NASD appeal hearing, in which the NASD lawyer who prosecuted his case before the DBCC defended the DBCC's decision before the NASD appeal panel. The DBCC imposed relatively minor sanctions on Pelaez based on its finding that Pelaez's conduct was mitigated by lack of bad faith, absence of customer harm, his cooperation with investigators and his apparent contrition. The NBCC rejected all mitigation evidence presented, except for remorse, and increased the sanctions against Pelaez. Nevertheless, Pelaez continues to urge the Commission to adopt the DBCC's more lenient view.

Although Commission Regulation 171.24, 17 CFR 171.24 (1999), affords the Commission the discretion at any time to direct that omissions to a record be corrected or a supplemental record prepared, the facts here do not warrant such action. The NBCC's rejection of Pelaez's claims of mitigation rendered irrelevant the contrary opinion of the lower panel. In any event, both the DBCC and the NBCC decisions were provided to the NFA hearing panel by its staff, and Pelaez did not attempt to submit the NASD appeal transcript during the NFA proceeding.

We also agree with the NFA's finding that Pelaez failed to demonstrate adequate rehabilitation, for reasons adequately explained in its decision. Pelaez attempted to escape responsibility for not paying an NASD-imposed fine by blaming his attorney. Tr. at 152-53. Pelaez also attempted to blame his attorney for his failure to notify the NFA of his NASD suspension. Id. at 156-58. Thus, Pelaez's testimony during the NFA proceeding actually demonstrates a pattern of irresponsibility rather than evidence of rehabilitation.

For the foregoing reasons, the decision below is affirmed.


By the Commission (Chairman RAINER and Commissioners HOLUM, SPEARS, NEWSOME and ERICKSON).

Jean A. Webb
Secretary of the Commission
Commodity Futures Trading Commission

Dated: September 24, 1999

1 Section 8a(3)(J) authorizes the NFA to revoke the registration of any person who is the subject of an outstanding order barring that person from association with any member of a self-regulatory organization. Pelaez admitted that he was permanently barred from association with any member of the National Association of Securities Dealers, which is a self-regulatory organization within the meaning of Section 8a(3)(J).

2 At a hearing before an NASD District Business Conduct Committee ("DBCC") Pelaez admitted wrongdoing, and the NASD entered evidence in the record in support of each charge of its complaint. Decision of the NASD National Business Conduct Committee ("NBCC"), slip op. at 3 (May 22, 1977).