NASD Comes under Fire Again
New Suit Says Group Derailed Muni Probe

September 5, 1996
By Charles Gasparino
Wall Street Journal

Less than a month after reaching a major settlement with federal regulators, the National Association of Securities Dealers is on the defensive once again.

A former top NASD investigator, Theresa Carr, claims she was forced to resign from her job in May after the self-regulatory body dragged its feet in pursuing her three-year probe of “pay-to-play” abuses in the $1.3 trillion municipal-bond market. Ms. Carr makes those assertions in a lawsuit filed yesterday in a New York state court, blaming the loss of her job on what she contends is an overly cozy relationship between the NASD and Wall Street bond underwriters.

The complaint, filed in Suffolk County, seeks $20 million as redress for Ms. Carr’s “constructive discharge” from her job as a compliance examiner in the NASD’s District 10 office here. Ms. Carr also is accusing the NASD of breach of contract, tortious interference, sexual harassment and intentional infliction of emotional distress.

“She was making waves in the municipal securities industry, and the [NASD] didn’t like it,” says Ms. Carr’s lawyer, Jacob Zamansky, of Singer Zamansky L.L.P., a securities industry law firm in New York. “We’re going to show that when someone vigorously pursues something at the NASD, and steps on the industry’s toes, they try to . . . get rid of her.”

The lawsuit comes at a difficult time for the NASD. The organization last month reached an unprecedented settlement with the Securities and Exchange Commission over charges that the NASD failed to prevent stockbrokers from engaging in anticompetitive behavior in the Nasdaq Stock Market. In its harshly worded report, the SEC also bashed the NASD for inadequate oversight of the municipal-bond market, especially in enforcing a 1994 rule designed to stop pay-to-play practices. The phrase refers to muni-bond underwriters who used campaign contributions to help win lucrative muni-bond business from state and local politicians.

The heart of Ms. Carr’s accusations is that the NASD is too closely tied to the very industry it is charged with regulating. In her position, people familiar with the matter say, Ms. Carr was a lead investigator in the NASD inquiry into municipal-market abuses, including the NASD’s probe of Wall Street’s ties to Armacon Securities, a small and now defunct brokerage outfit that had ties to former New Jersey Gov. Jim Florio.

An NASD spokesman said in a statement that the organization doesn’t “comment on current or pending litigation.” He said the NASD’s probe of Armacon continues and declined to elaborate.

Ms. Carr’s suit says that her supervisors at the NASD took steps to derail her efforts. According to her lawyer, Ms. Carr in April 1994 recommended that the NASD take some action against as many as 12 major firms in the municipal-bond market for various market violations involving Armacon. Around that time, her “responsibilities and stature at the NASD were becoming significantly diminished,” the lawsuit says.

Various probes of Armacon Securities have failed to penalize any top-tier Wall Street firms, despite actions against people at some smaller firms.

In 1993, the SEC, the Justice Department and the NASD each launched separate inquiries into charges that Armacon, which was owned by Mr. Florio’s then-chief of staff Joseph Salema and another Florio associate, Nicholas Rudi, had received compensation from some of the muni market’s most powerful players: Wall Street firms that wanted to curry favor with New Jersey politicians who controlled millions of dollars of muni-bond underwriting business.

Since that time, Mr. Salema has pleaded guilty in federal court to securities fraud. Mr. Rudi this year was acquitted of charges that he received kickbacks to help an investment bank win a municipal-bond deal in 1990. The SEC has vowed to continue its probe of Armacon.

But Ms. Carr contends the NASD’s inquiry is dormant.

Muni-market executives also have wondered what happened to the case. “I have long believed that self-regulation doesn’t work,” says Mark Schwartz, a former muni-market executive for Prudential Securities and a frequent critic of the NASD’s policing of the muni market. “If there is any substance to these allegations of the existence of coverup,” it will intensify the pressure from muni-market regulators.

Although the NASD isn’t alone in regulating munis, it provides front-line enforcement of rules enacted by the Municipal Securities Rulemaking Board, another self-regulatory body. These rules govern the day-to-day activities in the municipal-bond market, guiding how bonds are underwritten and traded.

Christopher Taylor, the MSRB’s executive director, recalls meeting with the NASD’s then-regulation chief, John Pinto, in the fall of 1994 regarding the Armacon investigation. “We discussed whether or not there might be any possible violations of MSRB rules,” Mr. Taylor said yesterday in an interview. “Based on the information they told us, it appeared there might be.” Mr. Taylor said he hasn’t heard any more from the NASD on the matter since then.

According to the lawsuit, Ms. Carr says there was never any interest in her various investigatory efforts from her supervisors. In October 1993, the lawsuit says, she met with the then-District 10 director, Douglas Henderson, and other staff members to discuss some of her findings. The lawsuit says Mr. Henderson told her not to pursue the matter because “this is the way that municipal business was done.” Mr. Henderson, who is currently chief compliance officer at Prudential Insurance Co. of America, didn’t return a telephone call for comment.

It wasn’t the last time Ms. Carr says she was rebuffed by her superiors. In February 1994, the lawsuit says, she intercepted a fax sent to the NASD’s Mr. Henderson from Dennis C. Hensley, director of compliance for J.P. Morgan Securities, a unit of J.P. Morgan & Co. The fax to her boss’s boss included a copy of Ms. Carr’s request for information about any Morgan ties to Armacon -- as well as a cover sheet showing that the two men had discussed the case. When Ms. Carr objected to the propriety of such discussions, the suit says, she was advised by her immediate supervisor, William O’Connell, to “mind your own business.”

Mr. O’Connell didn’t return a phone call. Late yesterday, a J.P. Morgan spokesman said, “We had no business relationship with Armacon.” But the fax incident may have marked a turning point in Ms. Carr’s career.

Ms. Carr said that after that point her responsibilities and stature at the NASD took a sharp drop. In February 1995, the suit alleges, there was a break-in at the NASD office in New York, and “files containing grand jury investigative material were apparently stolen,” the suit says. It adds that police and regulators were never notified of this incident.

In March 1996, the suit says, Ms. Carr was advised by an NASD official “that her investigation was `formally closed’“ and that “she should not seek access” to documents or proceed with the investigation.

Ms. Carr is only the latest of a long line of whistleblowers to emerge amid the recent regulatory scrutiny on the municipal-bond market. The SEC, Wall Street’s top cop, has met with these people in hopes of broadening its probe of alleged market abuses. Although the SEC won’t comment about Ms. Carr, her attorneys say she has already met with the SEC to discuss her beef with the NASD.