N.A.S.D. Criminal Unit's Activities Face Legal Challenge
New York Times (02/15/01) Vol. 55, No. 3 p.C1; Morgenson, Gretchen

Three years ago, the National Association of Securities Dealers (NASD) set up a unit to help federal prosecutors with criminal securities fraud cases. Today, however, this little-known criminal unit is the one facing scrutiny. D.L. Cromwell Investments, a small New York Brokerage firm, has filed a federal lawsuit against the NASD's unit. The firm alleges that the NASD Regulation is acting as an agent of the United States government. The suit charges that the unit is using its rules as a private entity to obtain testimony from executives--testimony that the government could not force on its own. The NASD Regulation, however, contends that it is a private organization conducting regulatory functions--which makes it a quasi-government agency. Since NASD Regulation is viewed as a quasi-government agency by the nation's court, it is immune from prosecution when sued by a member. When it enforces its rules, however, NASD maintains that it is a private organization. The apparent symbiotic relationship between the NASD and law enforcement officials creates a situation where information may be improperly shared. According to Martin P. Russo, an attorney representing Cromwell executives, "This [relationship] can't be permitted without establishing adequate procedures to prevent the transfer of information between [NASD Regulation] and the United States government which would give rise to the potential to violate constitutional rights."


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