Edgar Filing: QUALITY SYSTEMS, INC

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IN THE MATTER

OF

AHMED HUSSEIN

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DECISION

90-D-10

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Definitive Additional Materials

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

Filed by Registrant x Filed by a Party other than the Registrant ¨

Check the appropriate box:


¨	Preliminary Proxy Statement

¨	Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

¨	Definitive Proxy Statement

x	Definitive Additional Materials

¨	Soliciting Material under §240.14a-12

QUALITY SYSTEMS, INC.
(Name of Registrant as Specified In Its Charter)


(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

x	No fee required

¨	Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

	(1)	Title of each class of securities to which transaction applies:

	(2)	Aggregate number of securities to which transaction applies:

	(3)	Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

	(4)	Proposed maximum aggregate value of transaction:

	(5)	Total fee paid:


¨	Fee paid previously with preliminary materials.

¨	Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of this filing:

	(1)	Amount Previously Paid:

	(2)	Form, Schedule or Registration Statement No.:

	(3)	Filing Party:

	(4)	Date Filed:

Quality Systems, Inc. posted the information below to its website at http://www.qsi2012proxy.com.

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Quality Systems 2012 Proxy Contest vs. Ahmed Hussein

On August 16, 2012, Quality Systems will be holding a very important Annual Meeting, the outcome of which could affect control of the Board, as well as the value of your investment in Quality Systems. As you likely know by now, Ahmed Hussein, a dissident shareholder and current Board member, has launched yet again another proxy contest – and this time for a majority of the Board.

We believe that it is important that investors know the truth about Mr. Hussein so that investors can draw their own conclusions about his motivations and understand why we believe that turning control of the Board over to a slate of directors hand-picked by Mr. Hussein would place their investment in QSI at great risk.

As he has done in the past, Mr. Hussein makes assertions in his proxy statement filed with the SEC that we believe are misleading, mischaracterization of fact or outright false. He then states that the Company “has failed to refute any of the details of these events”. The purpose of this website is to present our view of the facts. We refute his characterizations of so-called corporate governance issues. We also believe that his record as a director has indicated that he lacks any strategic vision for the Company. Moreover, for reasons we explain below, we believe that Mr. Hussein is not trustworthy or credible. We think you will agree when you consider the following points about Mr. Hussein, which are discussed in greater detail below (for more information, see also the link to the Timeline of Ahmed Hussein’s Civil Suits, Regulatory Actions & Customer Complaints below). Mr. Hussein:

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Was sued by his client, in his former job as a broker, for among other things, excessive trading in a discretionary account managed by Mr. Hussein on behalf of an elderly couple which resulted in the account value dropping from over $2.4 million to approximately $70,000 and from which Mr. Hussein generated $1.9 million in commissions and more than $2 million in margin charges. The client’s case was ultimately settled by Mr. Hussein’s employer, Prudential-Bach Securities, Inc., for $2.5 million (for more information, see the link to the Frota case below);

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Was previously censured and fined by the American Stock Exchange, in his former job as a broker, after the exchange determined that he had “…willfully engaged in a course of fraudulent conduct in violation of Section 10(b) of the Securities Exchange Act of 1934, and Rule 10(b)-5 thereunder…” (for more information, see the link to the Frota case below);

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Was previously terminated by his employer, Dean Witter, for allegedly lying on an employee questionnaire because he failed to disclose a personal account that he held with his employer (for more information, see the link to the Dean Witter matter below);

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Refuses to comply with restrictions in the Company’s insider trading policy, including restrictions that prohibit insiders from placing Company stock in margin accounts – a policy which is recommended by leading corporate governance practitioners;

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Holds all of his shares of Company stock in margin accounts in violation of the Company’s insider trading policy, despite having certified to the Company he does not hold any shares in margin accounts;

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Routinely leaves Board meetings before their scheduled completion, missing important strategy discussions;

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Refuses to perform customary Board duties such as signing routine corporate documents, including board actions by written consent, directors evaluations, and SEC filings;

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Demands that the Board spend significant time on procedural matters that, upon full examination, are found to be meritless or insubstantial;

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Makes public statements regarding his personal views of Board matters which the majority of the Board have disagreed with or found to be false or misleading;

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Exhibits discourteous behavior in the Boardroom, including interrupting and acting in an inattentive manner;

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Was pursued by the IRS for failure to pay $700,000 in personal income taxes, a proceeding which Mr. Hussein settled;

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While Chairman of SIMO, an Egyptian paper company, was suspended from the board of directors in connection with the deterioration in SIMO’s financial condition; (for more information, see the link to the SIMO case below); and

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Previously, as Lead Director, managed to have himself appointed to all of the Company’s Board committees (including the Audit Committee when he owned 19.2% of the Company’s shares) in 2001.

The Proxy Contest – Part of a Pattern

For a brief period early in the Company’s history, in 2001, Mr. Hussein was Lead Director and, at the same time, a member of all Board committees (including the Audit Committee when he owned 19.2% of the Company’s shares). Since he was removed from the Chairmanship in 2002, we believe that Mr. Hussein has repeatedly sought to increase his influence over the Company. He has made four attempts to nominate directors to the Board, including two prior proxy contests and an unsuccessful litigation against the Company involving a challenge of the vote tabulated by an independent inspector of election. He is able to secure his

Board seat through cumulative voting. As a Board member and in connection with each proxy contest, he has used his platform as a Board member to make claims, which we believe are disruptive and without foundation, about the Company’s corporate processes and strategy. Both current and past Board members and executives have acknowledged this. In 2008, when Mr. Hussein last initiated a proxy contest, our management team, including Pat Cline, one of Mr. Hussein’s own nominees in this years’ election, made the following statements about Mr. Hussein:

“…Over the years Mr. Hussein has been destructive to shareholder value. He does not appear to understand or to care about our business or its strategy. Instead, he has harassed management and the majority of the Board with a seemingly never-ending stream of non-substantive attacks on the company. These attacks have not only cost us significant amounts of money to defend, they have threatened the ability of our management and employees to carry out our growth strategy in the face of increasingly intense competition.”

We believe these statements are equally true today.

Moreover, we believe that history shows that Mr. Hussein’s claims regarding the company’s strategic direction have been unfounded. In his 1998 proxy statement, Mr. Hussein claimed that the Company’s management lacked a strategic plan. Contrary to Mr. Hussein’s claim, our Board and management team had in place and implemented a strategy that resulted in compound annual growth in Quality System’s revenue and operating income at rates of 23% and 18%, respectively, since 2008.

LOGO

Over the same period, we paid cash dividends to shareholders each year and increased dividend payouts from $.50 per share in 2008 to $.70 per share in 2012.

In his current proxy statement, Mr. Hussein claims that with respect to the corporate matters of which he complains “…there are many credible witnesses, including the present and former directors of the Company named [in his proxy statement].” The incumbent directors on the Company’s slate disagree with Mr. Hussein’s view of the “facts” and find his statements to be inflammatory and misleading. To the best of our knowledge, Mr. Hussein’s views are his alone. Furthermore, we are struck by the fact that Mr. Cline, one of Mr. Hussein’s nominees who was privy to the facts, felt it necessary to enter into an indemnification agreement in connection with Mr. Hussein’s proxy solicitation.

Mr. Hussein’s Corporate Governance Record at the Company

Mr. Hussein claims to be a champion of good corporate governance, but we believe that his actions speak louder than words. Mr. Hussein’s time in the Boardroom is largely devoted to airing grievances regarding procedural and process matters that, in our opinion, are largely self-manufactured issues arising from manipulation of the facts. Your Board spends considerable time addressing these issues, but has generally found them to be meritless or insubstantial.

Ironically, Mr. Hussein does not seem to discuss his own record at the Company whatsoever. This is noteworthy because, in our opinion, Mr. Hussein has had a long history of unprofessional conduct and non-compliance with his director

responsibilities that belies his supposed concerns about corporate governance. For instance, Mr. Hussein regularly leaves Board meetings before their scheduled conclusion, thereby missing important discussions on management performance and strategy. He has declined to participate in our Board nomination process and vetting of Board nominees. He also has declined to sign routine corporate documents and filings required of directors, including board actions by written consent, director evaluations requests and SEC filings. If you review the Company’s filings with the SEC, you will note that since 2005, Mr. Hussein, unlike any other Board director, including directors previously nominated by him, has not once signed the Company’s Annual Report on Form 10-K.

Mr. Hussein also unequivocally refuses to comply with our current insider trading policy, which was duly adopted in July 2011 by all the members of our Board other than Mr. Hussein. In a letter from Mr. Hussein’s counsel on August 1, 2011, the Company was advised that Mr. Hussein took specific objection to the policy’s prohibition against directors holding shares of Company stock in margin accounts, noting only that Mr. Hussein held a significant number of shares of Quality Systems stock in brokerage accounts “with margin capabilities.” Margin accounts enable investors to use leverage by borrowing money from brokers to buy other securities using their existing securities as collateral. If the value of the collateral falls below a certain minimum requirement relative to the amount borrowed, the investor can be required to provide additional cash or other collateral to make up for the shortfall, or otherwise the broker may liquidate the margined shares into the open market, which, depending on the size of the liquidation, can potentially have significant, negative consequences on the shares’ trading price. Note that Mr. Hussein owns a significant amount of shares.

We believe that the restriction against insiders from margining Company stock addresses important risks to shareholders and protects the value of your investment. Margin investing, especially by a large shareholder such as Mr. Hussein, can have a significant impact on a company’s stock price and valuation. For example, if the individual does not have the means to cover a margin call or pay the loan, his shares can be sold to cover his position. Such a situation could impact the trading price of our shares and could also affect our reputation. A number of major companies, such as Green Mountain Coffee Roasters, Chesapeake Energy and Boston Scientific, have made headlines when insiders were forced to liquidate significant insider holdings to cover margin calls. Moreover, margin accounts facilitate short-selling of company shares. While we believe the margin restriction represents best practices in corporate governance and helps protect shareholder interests, Mr. Hussein nonetheless “refuses to abide by the restrictions in the insider trading policy that are not mandated by or that go beyond the requirements of the federal and state securities laws….”

On July 18, 2012, the Company learned that Mr. Hussein holds all of his 9,333,700 shares, representing 15.7% of the Company’s outstanding shares as of June 18, 2012, in margin accounts, which is in direct violation of the Company’s insider trading policy. He disclosed this fact for the first time in an amendment to his preliminary proxy statement. Strangely, Mr. Hussein had not previously disclosed this fact to the Company, despite the fact that the Company specifically asks for this information in director questionnaires collected on a periodic basis in order for the Company to complete its periodic reports with the SEC in compliance with federal law. Even though Mr. Hussein failed to disclose this information to the Company, he nonetheless certified that his responses to the questionnaire were “complete and accurate in every respect.”

We believe that Mr. Hussein only disclosed his margin accounts in his recent filing simply because he was caught. On July 13, 2012, Mr. Hussein asked a Company representative to join a call with Mr. Hussein’s broker, in which Mr. Hussein discussed his desire to transfer Company stock by him from one or more margin accounts to one or more new margin accounts at a different broker. On July 17, 2012, the Company wrote Mr. Hussein’s counsel a letter demanding that he disclose to the Company any Company shares held in margin accounts. Subsequently thereafter on July 18, 2012, Mr. Hussein, for the first time, disclosed publicly that all of his shares are pledged as collateral for various margin accounts. Mr. Hussein could have disclosed the existence of his margined shares in his director questionnaires, Schedule 13D filings or initially filed preliminary proxy statement, but he never ultimately disclosed this information to the Company or its shareholders until the day after he was questioned by the Company. We think that Mr. Hussein’s actions put his own economic interest ahead of the reputation of the Company, and potentially put the value of your investment at risk. Contrary to his claims, we believe that his interests are not aligned with those of QSI shareholders.

We ask you to consider the following questions:

How can Mr. Hussein, on one hand, tout the importance of corporate governance, and on the other, refuse to comply with the Company’s system of governance?

Why has Mr. Hussein never disclosed his significant holdings in margin accounts in response to the Company’s director questionnaires, even after having certified the accuracy of his responses?

If Mr. Hussein does not hold himself accountable to all of the Company’s policies, as we believe, will he hold himself accountable to you, the shareholders?

Mr. Hussein’s Background Prior to QSI

We think you should also consider Mr. Hussein’s personal and business experience. We believe that a close examination of his record reveals an undistinguished career and documented examples of unprofessional and untrustworthy behavior, including:

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Litigation brought by a client relating to, among other things, excessive trading in a discretionary account managed by Mr. Hussein on behalf of an elderly couple which resulted in the account value dropping from over $2.4 million to approximately $70,000 and from which Mr. Hussein generated $1.9 million in commissions and more than $2 million in margin charges. The client’s case was ultimately settled by Mr. Hussein’s employer for $2.5 million (see the Frota case link below).

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The American Stock Exchange’s censure of Mr. Hussein in connection with his handling of the Frota account. The exchange found that, among other things, Mr. Hussein excessively traded and churned the customer’s account for the purpose of generating commission income, misrepresented the status of the account to the customer and provided materially false and misleading information about the status of the account (see the Frota case link below).

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Mr. Hussein’s (unsuccessful) litigation over his termination from the Dean Witter securities brokerage firm for violations of company policy, including making a false statement in an internal questionnaire. (see Dean Witter link below)

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Proceedings brought with respect to Mr. Hussein’s nonpayment of income taxes aggregating approximately $700,000 for tax years 1983 and 1984. Mr. Hussein underpaid his personal income taxes and later claimed that he did not have the means to pay the taxes he owed. (see Tax Proceedings link below)

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Mr. Hussein’s involvement with SIMO, which experienced significant financial difficulties during Mr. Hussein’s tenure as Board chairman. SIMO was a successful Egyptian paper company, privatized by the Egyptian government in June 1997 in which Mr. Hussein acquired a majority stake and was appointed Chairman of the Board. During his term as Chairman, SIMO’s financial position deteriorated, incurring losses to the extent that its employees were not being paid during certain periods of 1998. Ultimately Mr. Hussein was removed from his position as Chairman by the Companies Authority in the Egyptian Ministry of the Economy (see SIMO link below).

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Mr. Hussein’s unsuccessful litigation against Quality Systems disputing the results of the 2005 director of elections (see “Mr. Hussein’s Prior Proxy Solicitations” below).

We believe the Frota and SIMO examples are highly relevant given that Mr. Hussein is now asking Quality Systems shareholders to turn over a majority of the Board to his hand-picked slate of director nominees. While we acknowledge that Mr. Hussein may be able to appoint himself to the Board as a result of cumulative voting, we believe that allowing him to extend his influence would be a risky gambit for shareholders to take— we believe that the details in the links below clearly show why this is the case.

Ahmed Hussein’s Civil Suits, Regulatory Actions & Customer Complaints 1985-2002

During the course of his career, Mr. Hussein has been involved, as a plaintiff and as a defendant, in a number of lawsuits, regulatory actions and related complaints from his own clients. The timeline included in the link below provides an illustration of his pattern of litigious behavior.

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Timeline of Ahmed Hussein’s Civil Suits, Regulatory Actions & Customer Complaints

Frota vs. Prudential-Bache Securities, Inc., Ahmed Hussein & John Rasweiller

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Summary of the Case and ASE Censure

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Denial of Defendant’s Motion to Dismiss

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American Stock Exchange Decision

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American Stock Exchange Stipulation

Middle East Paper Company (SIMO)

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SIMO Overview

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Excerpts from Post Privatization Development of Former Law 203 Companies

Hussein v. Dean Witter

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Summary of the Case

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Hussein’s Demand for Arbitration

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Dean Witter’s Response

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Arbitration Award

Tax Proceedings

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Summary of the Case

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Hussein’s Affidavit

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Denial of Hussein’s Motion for Injunction

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Court of Appeals Opinion

LOGO

Frota vs. Prudential-Bache Securities, Inc., Ahmed Hussein and John Rasweiller

Ahmed Hussein was employed as a commissioned account representative by Prudential-Bache Securities, Inc. from May 1, 1981 to May 1, 1986 when, according to his CRD report filed at the Financial Industry Regulatory Authority, Inc. (“FINRA”), he resigned voluntarily.

On December 12, 1988, Mr. and Mrs. Frota an elderly couple from Brazil, brought a legal action based against Ahmed Hussein, who was their commissioned account representative, Prudential-Bache Securities and Mr. Hussein’s supervisor, John Rasweiller, seeking, among other remedies, compensatory damages of $2,355,635.

The following are excerpts from the plaintiffs’ allegations contained in the Court’s decision, Fernando S. G. Frota and Maria Carmen Frota, Plaintiffs, v. Prudential-Bache Securities, Inc., Ahmed Hussein & John Rasweiller Defendants, No. 85 Civ.9698, United States District Court for the Southern District of New York decided May 14, 1987 and filed May 15, 1987:

In November 1981, the Frotas opened a so-called “discretionary account” at Prudential-Bache, over which Hussein, their broker, exercised complete control. Between November 1981 and January 1982, the Frotas transferred a portfolio valued at $2,771,635 from the Chase Manhattan Bank in Switzerland to the Prudential-Bache account. They withdrew $347,000 for their own use; the remaining $2,424,635 [**3] was managed and invested solely by Hussein.

Between November 1981 and June 1985, a period of approximately 920 trading days, Hussein made 1,224 purchases and sales of securities for the Frotas’ account. Hussein generated $1,900,000 in commissions and more than $2,000,000 in margin charges. When the account was finally liquidated in June 1985, only $69,000 remained. Of the 1,224 transactions for the Frotas’ account, 200 were purchases and sales of the same security in a single day; 700 were purchases and sales of the same security within a 30-day period; 165 were purchases and sales of securities for which Prudential-Bache was the sole market-maker.

Hussein also purchased, for the Frota’s account, $ 7,204,506 worth of Certificates of Accrued Treasury Securities (“CATS bonds”), a type of treasury [*4] bond issued by the U.S. government which has all of its interest coupons previously removed by the original purchaser. Although there is a secondary market for the bonds, appreciation depends upon downward fluctuations in interest rates. Hussein purchased the bonds by margining the Frotas’ account.” (Emphasis added.)

On May 14, 1987 Prudential-Bache Securities, Inc.’s, request for summary judgment was denied by the Court. On June 1, 1987, Prudential-Bache Securities, Inc. settled with Mr. and Mrs. Frota for $2,500,000. The legal cost of the litigation and the settlement was funded solely by Prudential-Bache Securities.

Three years later the American Stock Exchange brought regulatory actions against Mr. Ahmed Hussein in the same matter.

American Stock Exchange Regulatory Action against Ahmed Hussein

The American Stock Exchange in a Statement of Charges dated April 16, 1990 brought a regulatory action against Ahmed Hussein related to the customer complaint and litigation filed by Fernando and Maria Frota.

The American Stock Exchanges STATEMENT OF CHARGES 90-D-10 dated April 16, 1990 against Ahmed Hussein lists the following factors among others (bold emphasis added):


•	2.7	Frota also advised Hussein that he was unable to monitor activities in his account because he did not understand the monthly statements. Hussein told Frota the statements were decipherable only to industry professionals, and that he should not try to comprehend them.

•	2.8	Between November 1981 and June 1985, purchases in the Frota account totaled over $72,000,000 on an average monthly equity of approximately $2,600.000; margin charges totaled over $2,100,000. The account suffered a net loss of nearly $1 million during the above period.

•	3.0	During all relevant periods, no margin agreement was signed by the Frotas.

•	3.1	During the account’s history, the turnover ratio was 27, annualized to 7.2. A return of 93.47% of the net investment value of the account was needed to pay for the commissions generated. A total of 24.79% of the investment value of the account was needed to pay annual commissions which totaled approximately $2.8 million over the life of the account.



•	3.2	In approximately 920 trading days from 1981 to 1985, Hussein effected 1,224 trades in the Frota account, including purchases and sales. Of these trades, about 200 were simultaneous purchases and sales of the same securities within the same day; nearly 700 were purchases and sales of the same securities within a 30 day period.

•	4.1	Over the life of the account, Hussein purchased approximately $7 million in Certificates of Accrued Treasury Securities (“CATS”) for the Frota account, generating as much as $850,000 in commissions. These bonds paid no interest and, if held until maturity in the years 2007, 2011 and 2014, the Frotas would be well over 100 years old.

•	4.5	By letter dated October 13, 1983 Frota requested that the account be transferred from Prudential-Bache to Chase Manhattan Bank because of the costs associated with trading in the account. Hussein informed Frota on this date for the first time that his account was margined for approximately $5 million and could not be transferred. Prior to this time, Hussein told Frota that his account was doing well and that he had nothing to worry about. In October 1984 and April 1985, Frota again wrote to Hussein in an attempt to transfer his account. The account was transferred in the summer of 1985 to Shearson Lehman Hutton.

The American Stock Exchange states in its Stipulation of Fact and Consent to Penalty, dated March 7, 1991, which was agreed to by Ahmed Hussein without admitting or denying the allegations (emphasis added):



•	5.0	Hussein violated Exchange Rules 924(c) and 422 by abusing his discretionary authority in the Customer A [Frota] account in that he effected excessive transactions…

•	5.1	Hussein engaged in conduct inconsistent with just and equitable principal of trade in violation of Exchange Rule 345 by misrepresenting the situation of the account to Customer A and failing to follow specific customer instructions to close the account…

•	5.2	Hussein violated Article V, Section 4(i) made applicable to employees of member organizations by Exchange Rule. 345(a)(1), in that he willfully engaged in a course of fraudulent conduct in violation of Section 10(b) of the Securities Exchange Act of 1934, and Rule 10(b)-5 thereunder by:

(a) excessively trading and churning the Customer A account, while vested with discretionary authority for the purpose of generating commission income…

(b) misrepresenting the status of the account to Customer A… and

The American Stock Exchange imposed the following penalties against Ahmed Hussein:

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Censure

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A fine of $25,000

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Three months suspension from servicing any new discretionary accounts

41 of 47 DOCUMENTS

Fernando S. G. Frota and Maria Carmen Frota, Plaintiffs, v. Prudential-Bache Securities, Inc., et al., Defendants

No. 85 Civ. 9698 (WCC)

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK

1987 U.S. Dist. LEXIS 3916; Fed. Sec. L. Rep. (CCH) P93,253

May 14, 1987, Decided; May 15, 1987, Filed

CASE SUMMARY:

PROCEDURAL POSTURE: Defendants, a brokerage and a broker, filed a motion for summary judgment in an action brought by plaintiff customers alleging violations of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.S. § 78j(b), rule 10b-5 of the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5 (1985), the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C.S. §§ 1961-1968, and state law.

OVERVIEW: During a period of approximately 920 trading days, the broker made 1,224 purchases and sales of securities for the customers’ account thereby generating $ 1,900,000 in commissions and more than $ 2,000,000 in margin charges. The broker also purchased $ 7,204,506 worth of certificates of accrued Treasury securities. When the account was finally liquidated, only $ 69,000 remained of the original $ 2,424,635. The brokerage argued that any claim for fraud was barred by the doctrines of ratification, waiver, and estoppel because the customers had not made timely objections after receiving account statements and had authorized the broker’s activities. The customers, who lived in Brazil, alleged that they did not regularly receive account statements, and that in opening the account they had signed blank papers presented by the broker. In denying defendants’ summary judgment motion, the court held that material issues of fact existed concerning the customers’ trading objectives and the particular representations made to them by their broker. While the Treasury securities were exempt from regulation, a question existed whether they were suitable investments for the customers’ account.

OUTCOME: The court denied defendants’ motion for summary judgment.

CORE TERMS: trading, customer, broker’s, summary judgment, material facts, confirmation, unsuitable, estoppel, churning, matter of law, unsuitability, ratification, traded, cover letter, fails to state, cause of action, discretionary account, government securities, secondary market, misrepresentation, speculation, excessive, disputed, exempted, monthly, dealer, handled, opened, margin, fully disclosed

LexisNexis(R) Headnotes

Civil Procedure > Summary Judgment > Standards > Genuine Disputes

Civil Procedure > Summary Judgment > Standards > Materiality

[HN1] A court may grant a motion for summary judgment only if it determines that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. The court’s responsibility is to assess whether there are any factual issues to be tried, while resolving ambiguities and drawing inferences against the moving party.

Securities Law > Liability > Advisers, Brokers & Dealers > Churning

Securities Law > U.S. Securities & Exchange Commission > Penalties & Unlawful Representations

1987 U.S. Dist. LEXIS 3916, *; Fed. Sec. L. Rep. (CCH) P93,253

Evidence > Procedural Considerations > Burdens of Proof > General Overview

Securities Law > Liability > Advisers, Brokers & Dealers > Churning

Securities Law > U.S. Securities & Exchange Commission > Penalties & Unlawful Representations

[HN3] To establish a cause of action for churning, plaintiffs must show that (1) the broker or dealer exercised control over the account, and (2) the broker or dealer traded the account excessively, considering the investment objectives of his customer and the size of the account.

Securities Law > U.S. Securities & Exchange Commission > Penalties & Unlawful Representations

[HN4] To establish churning, more must be shown than merely an abnormal number of trades. In a churning case the independent objectives of a customer are an important standard against which to measure claimed excessiveness.

Civil Procedure > Pleading & Practice > Defenses, Demurrers, & Objections > Waiver & Preservation

Securities Law > U.S. Securities & Exchange Commission > Necessity for Regulation

[HN5] The purpose of the Securities and Exchange Act is to protect the innocent investor, not one who loses his innocence and then waits to see how his investment turns out before he decides to invoke the provisions of the Act.

Civil Procedure > Pleading & Practice > Defenses, Demurrers, & Objections > Waiver & Preservation

Securities Law > Liability > Securities Exchange Act of 1934 Actions > Implied Private Rights of Action > Deceptive & Manipulative Devices

[HN6] Even express consent to churning does not raise a defense of waiver or estoppel if the consent is induced by undue influence over the customer, or results from the customer’s trust and confidence in the broker.

Securities Law > Blue Sky Laws > Exempted Issuers

Securities Law > Exemptions From Registration > Exempt Classes of Securities

Securities Law > Liability > Securities Exchange Act of 1934 Actions > Implied Private Rights of Action > Deceptive & Manipulative Devices

[HN7] While government bonds may be exempt from certain section of the Securities Exchange Act of 1934, any manipulative or deceptive device used in connection with the sale of even exempted securities is clearly within the reach of § 10(b). 15 U.S.C.S. § 78j(b), 17 C.F.R. § 240.10b-5 (1985).

Securities Law > Liability > Securities Exchange Act of 1934 Actions > Implied Private Rights of Action > Deceptive & Manipulative Devices

[HN8] The knowing or intentional recommendation of an unsuitable security states a cause of action for fraud under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.S. § 78j(b), and rule 10b-5 of the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5 (1985).

COUNSEL: [*1] EDUARDO F. LOPEZ, ESQ., P.C., Attorney for Plaintiffs.

CAHILL GORDON & REINDEL, ESQS., Attorneys for Defendants, THOMAS J. KAVALER, ESQ., LISA PEARSON, ESQ., Of Counsel.

OPINION BY: CONNER

OPINION

OPINION AND ORDER

CONNER, D. J.:

Plaintiffs Fernando S.G. Frota and Maria Carmen Frota (“the Frotas”) brought this action against Prudential-Bache Securities, Incorporated (“Prudential-Bache”) and Ahmed Hussein (“Hussein”), their broker at Prudential-Bache, alleging violations of section 10(b) of the Securities Exchange Act of 1934 (“the ‘34 Act”), 15 U.S.C. § 78j(b) (1982); Securities and Exchange Commission rule 10b-5, 17 C.F.R. § 240.10b-5 (1985); the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1961-1968 (1982); and the laws of the state of New York. Subject matter jurisdiction

1987 U.S. Dist. LEXIS 3916, *; Fed. Sec. L. Rep. (CCH) P93,253

is predicated upon section 27 of the ‘34 Act, 15 U.S.C. § 78aa (1982), section 1964 of RICO, 18 U.S.C. § 1964 (1982), the diversity of citizenship of the parties, and the doctrine of pendent jurisdiction.

This matter is now before the Court on defendants’ motion for summary judgment pursuant to rule 56 of the Federal Rules of Civil Procedure on the grounds that (1) plaintiffs’ complaint is barred [*2] by the doctrines of ratification, waiver and estoppel; (2) plaintiffs’ unsuitability claim fails to state a cause of action as a matter of law; and (3) any claims predicated on a misrepresentation theory must be dismissed because the material facts allegedly withheld from plaintiffs were fully disclosed by their account statements. Because defendants fail to establish that no genuine issue of material fact exists, their motion for summary judgment must be denied.

BACKGROUND

In November 1981, the Frotas opened a “discretionary account” at Prudential-Bache, over which Hussein, their broker, exercised complete control. Between November 1981 and January 1982, the Frotas transferred a portfolio valued at $ 2,771,635 from the Chase Manhattan Bank in Switzerland to the Prudential-Bache account. The Frotas withdrew $ 347,000 for their own use; the remaining $ 2,424,635 was managed and invested solely by Hussein. At the time of opening their account, the Frotas executed a Customer’s Agreement, a Joint Account Agreement, an Option Agreement and a Power of Attorney (Bialow Affidavit Exhibits 1-3 and 5, respectively).

During the time the account was open, the confirmations and monthly statements [*3] issued by Prudential-Bache on the account were not delivered to the Frotas either in Brazil or at their New York apartment. Up until June of 1982, they were delivered to Hussein, and thereafter to John F. Rasweiler, the supervisor of the Wall Street Branch where the account was located. At various times during the period in which the account was open, Frota met with Hussein and on each occasion he was given a few account statements.

Between November 1981 and June 1985, a period of approximately 920 trading days, Hussein made 1,224 purchases and sales of securities for the Frota’s account. Hussein generated $ 1,900,000 in commissions and more than $ 2,000,000 in margin charges. when the account was finally liquidated in July 1985, only $ 69,000 remained. Of the 1,224 transactions for the Frotas’ account, 200 were purchases and sales of the same security in a single day; 700 were purchases and sales of the same security within a 30-day period; 165 were purchases and sales of securities for which Prudential-Bache was the sole market-maker.

Defendants argue that plaintiffs’ complaint is barred by the doctrines of ratification, waiver and estoppel because plaintiffs did not object upon receipt of confirmations and account statements and because they signed a Prudential-Bache letter approving the way their account was being handled. Defendants further claim that the Frotas have waived their right to complain about transactions in their account by failing to make timely objections thereto, as required by the Customer Agreement they signed when the account was opened. That agreement states in part:

“Reports of the executions of orders and statements of my account shall be deemed conclusive if not objected to in writing within five days or ten days respectively, after transmittal to me by mail or otherwise.” (Bialow Affidavit Exhibit 1, para. 10)

Since the Frotas apparently made no such objections to any transactions, defendants [*5] urge they are entitled to summary judgment.

DISCUSSION

[HN2] Churning occurs in a securities account when a broker or dealer, acting in his own interests and against those of his customer, engages in trading that is disproportionate to the size and character of the account traded. Landry v. Hemphill, Noyes & Co., 473 F.2d 365, 368 n.1 (1st Cir. 1973), cert. denied, 414 U.S. 1002 (1973). [HN3] To establish

1987 U.S. Dist. LEXIS 3916, *; Fed. Sec. L. Rep. (CCH) P93,253

a cause of action for churning, plaintiffs must show that (1) the broker or dealer exercised control over the account, and (2) the broker or dealer traded the account excessively, considering the investment objectives of his customer and the size of the account. Kravitz v. Pressman, Frohlich & Frost, Inc., 447 F. Supp. 203, 211. (D. Mass. 1978).

[*6] The Frotas’ discretionary account named, Hussein as the trader and it is not disputed that Hussein exercised effective control over the account. Whether the account was traded excessively, however, is more difficult to determine. [HN4] To establish churning, more must be shown than merely an abnormal number of trades. “In a churning case the independent objectives of a customer are an important standard against which to measure claimed excessiveness.” Fey v. Walston & Co., Inc., 493 F.2d 1036, 1045 (7th Cir. 1974).

The parties dispute the facts regarding the stated investment objectives of the Frotas. An Option Form and Agreement, signed by the Frotas, contains information, filled in by hand, representing the Frotas as having two years investment experience actively trading options both in cash and on margin. The form lists their investment objectives as income and speculation (Defendants’ Exhibit 3). The Frotas claim they signed the Option Agreement, along with the numerous other documents required to open the account, when it was blank (Frota Affidavit para. 6). They claim Hussein later filled in the information that appears, completely misrepresenting the Frotas’ investment experience [*7] (Frota Affidavit para. 7). The Frotas further claim that they told Hussein their investment objectives were conservative; they wanted “to apply the money in good investments, without speculations.” (Frota Affidavit para. 6) Defendants claim the FrOtas were wealthy speculators interested in high yields and argue that they are bound by the documents signed when the account was opened.

Since the question of whether trading is excessive must be examined in light of the trading objectives of the customer and since the Frotas’ trading objectives cannot be established as a matter of law, a material question of fact remains unresolved. The nature of the plaintiffs’ account and any possible misrepresentation by Hussein, therefore, remain open questions and must be resolved at trial. See Moscarelli v. Stamm, 288 F. Supp. 453 (E.D.N.Y. 1968).

Defendants argue that the circumstances surrounding the signing of the agreements are not material since plaintiffs received monthly statements and did not object to the management of the account. They assert the equitable defenses of ratification, waiver and estoppel, well-recognized defenses to securities fraud claims. [HN5] “The purpose of the Securities [*8] and Exchange Act is to protect the innocent investor, not one who loses his innocence and then waits to see how his investment turns out before he decides to invoke the provisions of the Act.” Royal Air Properties, Inc. v. Smith, 312 F.2d 210, 213-214 (9th Cir. 1962).

The establishment of the defense of ratification and waiver depends upon the trading experience of the plaintiffs and whether plaintiffs knowledgeably consented to the acts of defendants. In Hecht v. Harris, Upham & Co., 430 F.2d 1202 (9th Cir. 1970), the Ninth Circuit affirmed a finding by the District Court barring, on the basis of estoppel, laches and waiver, the plaintiff’s claim under section 10(b) that defendant traded in securities and commodities unsuitable for plaintiffs’ needs and objectives and contrary to her instructions. In Hecht, the plaintiff spoke with her broker every day. She organized her confirmation slips in order to discuss them with her broker, in person, at least once a week. Her trading activities were also independently examined by her tax accountants and she was occasionally represented by an attorney. Id. at 1208; see also Landry v. Hempill, Noyes & Co., 473 F.2d 365 (1st [*9] Cir. 1973) (where Court found that plaintiff’s “obvious experience” and failure to object to trades done over a twenty-two month period failed to support a claim for churning).

In addition to the added experience or knowledge necessary to ascertain a pattern of churing, [HN6] “[e]ven express consent to churning does not raise a defense of waiver or estoppel if the consent is induced by undue influence over the customer, or results from the customer’s trust and confidence in the broker.” Kravitz v. Pressman, Frohlich & Frost, Inc., 447 F. Supp. at 211 (citing Fey v. Walston & Co., Inc., 493 F.2d at 1050).

The facts supporting the defense of estoppel and waiver are much less clear here than they were in Hecht. The Frotas live in Brazil and made visits to New York, during which Mr. Frota would meet with Hussein, only every three to four months. Whether the Frotas received all their confirmation slips is disputed. Also, the sporadic manner in which they received confirmation slips and statements raises question about whether plaintiffs were aware of specific purchases or understood the significance of the overall pattern of trading. Frota claims he found the statements incomprehensible [*10] and that he was encouraged by Hussein not to attempt to understand the statements (Frota Affidavit para. 13). Ratification of Hussein’s actions would require that the Frotas received the trading confirmations, had the stock market experience and knowledge to comprehend those actions and then failed, within a reasonable time, to object. See Jaksich v. Thomson McKinnon Securities, Inc., 582 F. Supp. 485 (S.D.N.Y. 1984).

1987 U.S. Dist. LEXIS 3916, *; Fed. Sec. L. Rep. (CCH) P93,253

Defendants point to a form sent to the Frotas by the Prudential-Bache compliance department under a cover letter dated September 8, 1983. The cover letter states that the compliance department had noticed substantial trading in their account and asks that the Frotas reexamine their customer statements and sign the enclosed statement approving the way their account was being handled. The Frotas signed the form on October 10, 1983. Defendants claim that the fact the Frotas signed the form is further support for their argument that the Frotas ratified Hussein’s actions. Plaintiffs dispute this and claim that Hussein brought the form to them without the cover letter, stating that it had to be signed “for his files” so he could “continue to supervise [the Frotas’] investments.” [*11] (Frota Affidavit para. 15). Plaintiffs claim that if they had seen the September 8, 1983 cover letter they would have been alerted to the alleged misconduct.

The text and the tone of the letter could have put the Frotas on notice of the importance of the otherwise routine approval form. Whether the Frotas received all of the confirmations and statements and whether they received the September 8th letter are material facts, as they bear upon whether the Frotas knowingly consented to the way Hussein handled their investments. Additionally, the disputed facts as to the Frotas’ investment objectives, their investment experience and consequent ability to understand either that the securities purchased were unsuitable that the level of trading was excessive are issues of material fact that must be resolved at trial.

Plaintiffs’ unsuitability claim involves Hussein’s purchase of the CATS Bonds. Plaintiffs allege that defendant Hussein failed to explain the nature of the CATS Bonds to Frota. Plaintiffs claim that Hussein knew that the Frotas were ignorant of the mark-up in the CATS bonds, the speculative nature of the securities and the risks of heavy trading on margin. Finally, plaintiffs [*12] contend that defendants purchased the bonds for the Frotas with the sole purpose of generating for themselves an enormous and unreasonable profit in commissions or mark-ups.

Defendants argue that they are entitled to summary judgment on this issue because plaintiffs’ unsuitability theory fails to state a claim as a matter of law. It is defendants’ argument that a case for unsuitability under 10b-5 is “informed” by the NASD rules of fair practice. Plaintiffs fail to state a claim, defendants argue, because government securities are exempted under NASD rules and so, as a matter of law, a broker’s recommendation cannot violate 10(b)5. Further, they argue that even if government securities do fall within the unsuitability rule, they are not liable because plaintiffs cannot show the CATS bonds were unsuitable or that defendants acted with the requisite scienter.

The fact that CATS bonds are “exempted securities” under the 34 Act is not relevant here. [HN7] While government bonds may be exempt from certain section of the 34 Act, any manipulative or deceptive device used in connection with the sale of even exempted securities is clearly within the reach of section 10(b). 15 U.S.C. § 78j(b) (1982), [*13] 17 C.F.R. § 240.10b-5 (1985). The enormous volume of trading in CATS bonds for the Frotas’ account clearly indicates that these obligations were not purchased for long-term investment, but for rapid turnover speculation in interest rate fluctuations, a type of trading which may be unsuitable for many customers even if the underlying securities represent the ultimate in safety. Further, the fact that the NASD Rules of Fair Trading do not apply to transactions in government securities is also irrelevant. Plaintiffs have not based their 10b-5 claim on the NASD rules as it is clear that no private right of action exists under the NASD rules. Frota v. Prudential-Bache Securities, Inc., 639 F. Supp. 1186, 1190 (S.D.N.Y. 1986).

In this circuit, [HN8] the knowing or intentional recommendation of an unsuitable security states a cause of action for fraud under section 10(b) and rule 10b-5. Clark v. John Lamula Investors, Inc., 583 F.2d 594, 600 (2d Cir. 1978); Clark v. Kidder, Peabody & Co., Inc., 636 F. Supp. 195, 198 (S.D.N.Y. 1986); Leone v. Advest, Inc., 624 F. Supp. 297, 304 (S.D.N.Y. 1985). In order to prevail upon their claim, plaintiffs only have to show that defendants, knowing [*14] the CATS bond trading to be unsuitable in light of the Frota’s stated investment objectives, purchased them for their discretionary account. See Clark v. Kidder, Peabody & Co., Inc., supra. at 198 . . .

As I have indicated above, the Frota’s investment objectives are unclear. It is also unclear what Hussein’s purpose in purchasing the CATS Bonds might have been. It is undisputed that Prudential-Bache was a market maker for the bonds. Defendants claim, however, that the bonds had an active secondary market and that there may have been attractive tax advantages to nonresidents if the bonds were sold on the secondary market before maturity. Plaintiffs claim that the excessive mark-up taken by defendants made it unlikely that they would realize a profit on resale. The question of Hussein’s intent regarding the purchase of the bonds is a question of fact and should be determined by the jury at trial where his credibility can be assessed. See S. E. C. v. Research Automation Corp., 585 F.2d 31, 33 (2d Cir. 1978) (Summary judgment likely to be inappropriate when the issues concern intent).

Defendants’ basis for summary judgment on the state law claims echoes their federal arguments. [*15] They argue that plaintiffs’ claims of misrepresentation and breach of fiduciary duty must be dismissed because the material facts allegedly withheld were fully disclosed in the monthly account statements. As discussed above, it is unclear how many

1987 U.S. Dist. LEXIS 3916, *; Fed. Sec. L. Rep. (CCH) P93,253

account statements the Frotas received, how much they understood about what was being done for their account and what Hussein represented to them was being done.

CONCLUSION

After a careful examination of the affidavits and exhibits submitted to the Court by both parties, I have concluded that there are material facts in dispute. Accordingly, for the reasons stated above, defendants’ motion for summary judgment is denied.

SO ORDERED.

AMERICAN STOCK EXCHANGE

DISCIPLINARY PANEL

On April 16, 1990, the Exchange instituted a formal disciplinary proceeding against Ahmed Hussein (“Hussein”), a former registered employee of Prudential Securities, Inc., a regular member organization of the Exchange. A hearing was held on June 19, 1991, pursuant to Article V, Section 2 of the Exchange Constitution, to review a Stipulation of Facts and Consent to Penalty entered into between the Exchange and Hussein for the purpose of settling this proceeding. (A copy of this document is annexed hereto.)

The Panel accepts the Stipulation of Facts and Consent to Penalty and finds, as set forth in the stipulated facts, that Hussein violated: Exchange Rules 924(C) and 422 by abusing his discretionary authority in a customer account by effecting excessive transactions; Exchange Rule 345 by engaging in conduct inconsistent with just and equitable principals of trade by misrepresenting the status of the account to a customer and failing to following specific customer instructions to close the account; and Article V, Section 4(i), made applicable to employees by Exchange Rule 345(a)(1), by engaging in a course of fraudulent conduct in violation of Section lO(b) of the Securities Exchange Act of 1934, and Rule lOb-5 thereunder by:

excessively trading and churning the customer’s account, while vested with discretionary authority for the purpose of generating commission income;

misrepresenting the status of the account to the customer; and

providing a customer with materially false and misleading information about the status of his account.

Further, the Panel imposes the following penalties upon Hussein:

1)	a censure;

2)	a $25,000 fine; and

3)	a three month suspension from servicing any new discretionary accounts.

FOR THE DISCIPLINARY PANEL

LOGO

PAUL OSCHER, CHAIRMAN

Dated: July 17, 1991

Disciplinary Panel

American Stock Exchange, Inc.

IN THE MATTER

AHMED D. HUSSEIN

STIPULATION OF FACTS

AND

CONSENT TO PENALTY

This proceeding was instituted by the American Stock Exchange, Inc., (the “Exchange”) by means of a Statement of Charges dated April 16, 1990, preferred against Ahmed D. Hussein (“Hussein”), a former registered employee of Prudential-Bache Securities, Inc. (“Prudential-Bache”), a regular member organization of the Exchange. This Stipulation of Facts and Consent to Penalty is entered into pursuant to Rule 345(c) of the American Stock Exchange, sole1y for the purpose of this proceeding, in order to settle and conclude all disciplinary actions by the Exchange against Hussein based upon and arising out of the facts hereinafter stipulated and set forth in the Statement of Charges. Hussein, without admitting or denying the allegations contained in the Statement of Charges or in this Stipulation of Facts and Consent to Penalty, hereby consents to the findings of violations of Exchange rules and to the imposition of the penalties hereinafter provided. Hussein also agrees that this settlement is subject to approval by an Exchange Disciplinary Panel and by the Exchange’s Board of Governors and that, if so approved, it shall constitute a final decision which may not be appealed by said Respondent.

STATEMENT OF FACTS:

1.0	During all relevant periods, Hussein was a registered employee at Prudential-Bache’s Manhattan branch office, and was certified to handle public customer options accounts. On May 1, 1986 Hussein resigned from Prudential-Bache. He is currently employed with another Exchange member organization.

1.2	The Exchange retained jurisdiction over Hussein by letter dated October 13, 1986; receipt acknowledged.

2.0	On November 5, 1981, Customer A opened an options account with Hussein at Prudential-Bache. To open the account, Customer A transferred securities that had a market value at the time of transfer of $2,700.00 to Hussein at Prudential-Bache from a foreign bank account.

2.1	An Options New Account Form (“ONAF”), Customer Agreement, and Power of Attorney dated November 5, 1981 granting Hussein discretion to effect trades in the account, were, according to Customer A, signed in blank by Customer A and subsequently completed by Hussein.

2.2	The ONAF, prepared by Hussein, reported the following information for the Customer A:


Date of Birth:		5/21/1915

Employment:		Retired

Annual Income:		“Over $10,000”

Liquid Net Worth:		“Over $10,000”

Estimated New Worth:		“Over $10,000”

Investment Experience:		2 years-Stocks, Bonds & Options

Investment Objectives:		Income and Speculation

Trading:		Actively

2.3

According to Customer A at the time the options account was opened, Customer A had no direct stock, bond or options trading experience, and had previously invested his funds through a bank primarily in blue chip stocks and certificates of deposit with one year maturities. In addition, according to Customer A, at the time the account was opened, Customer A advised Hussein that he was looking for a reasonable return on his investments without great risks.

2.4

From the opening of the account in November 1981 and until in or about January of 1982, confirmations and monthly statements for the Customer A account were sent to the New York address of Customer A’s former shipping company. Thereafter, pursuant to written instructions from Customer A dated January 7, 1982, these documents were sent directly to the branch office manager. At no time did Customer A directly receive confirmations and monthly statements for transactions effected in his account.

2.5	As stated in paragraph 2.1 above, Customer A granted Hussein discretionary authority over his account. Hussein made investment decisions for the account and effected all purchases and sales.

2.6

During the life of the account, Customer A made periodic trips to New York; he met with Hussein and/or the branch office manager who reviewed the account statements and confirmations with him. According to Customer A, on these occasions, Hussein assured Customer A that his account was performing well and that he had nothing to worry about.

2.7

According to Customer A, Customer A also advised Hussein that he was unable to monitor activities in his account because he did not understand the monthly statements. According to Customer A, Hussein told Customer A the statements were decipherable only to industry professionals, and that he should not try to comprehend them.

2.8	Between November 1981 and June 1985, purchases in the Customer A account totaled over $72,000,000 on an average monthly net equity of approximately $2,600,000; margin charges totaled over $2,100,000. The account suffered a net loss of nearly $1 million during the above period.

3.0

During the account’s history, the turnover ratio (purchases divided by average monthly equity) was 27, annualized to 7.2. A return of 93.47% of the net investment value of the account was needed to pay for the commissions generated. A total of 24.79% of the investment value of the account was needed to pay annual commissions which totaled approximately $2.8 million over the life of the account.

3.1

In approximately 920 trading days from 1981 to 1985, Hussein effected 1,224 trades in the Customer A account, including purchases and sales. Of these trades, about 200 were simultaneous purchases and sales of the same securities within the same day; nearly 700 were purchases and sales of the same securities within a 30 day period. Many of these trades were in new issues.

4.0	Under Hussein’s discretion, the Customer A account traded common stocks, equity options, zero coupon bonds and new issues in contrast to Customer A’s previous portfolio at another financial institution which consisted of blue chip stocks, Eurobonds, cash, and certificates of deposit.

4.1

Over the life of the account, Hussein purchased approximately $7 million in Certificates of Accrued Treasury Securities (“CATS”) for the Customer A account, generating approximately $250,000 in commissions. These bonds paid no interest and, if held until maturity in the years 2007, 2011 and 2014, Customer A would be over 100 years old.

4.2

Between September 1982 through March 1984, Hussein effected 155 corporate bond trades for the Customer A account, engaging in multiple trading (buying and selling the same bonds) and switching within the account (selling bonds and replacing them with the purchase of the same or another bond of the same value). See Attachments A and B.

4.3

As a result of the multiple trading in National Steel Corp. bonds between September 1982 and January 1983, Hussein earned over $91,000 in commissions, and made a profit for the Customer A account of $83,500. As a result of multiple trading between September and November 1982, in Bethlehem Steel Corp. bonds maturing on March 1, 2005, Hussein caused the Customer A account to sustain a loss of $18,500 while generating $61,800 in commissions. (See Attachment B).

4.4	As a result of switching in National Steel Corp. and Bethlehem Steel Corp. bonds in the Customer A account, Hussein earned over $100,000 in commissions. (See Attachment A).

4.5

According to Customer A, by letter dated October 13, 1983 Customer A requested that the account be transferred from Prudential-Bache to Chase Manhattan Bank because of the costs associated with trading in the account. Hussein, according to Customer A, informed Customer A on this date for the first time that his account was margined for approximately $5 million and could not be transferred. According to Customer A, prior to this time, Hussein told Customer A that his account was doing well and that he had nothing to worry about. According to Customer A, in October 1984 and April 1985, Customer A again wrote to Hussein in an attempt to transfer his account. The account was transferred in the summer of 1985 to Shearson Lehman Hutton.

CONCLUSION:

By reason of the above stipulated facts a Disciplinary Panel may conclude that:

5.0	Hussein violated Exchange Rules 924(c) and 422 by abusing his discretionary authority in the Customer A account in that he effected excessive transactions as described in paragraph 2.0 through 4.5 above.

5.1

Hussein engaged in conduct inconsistent with just and equitable principal of trade in violation of Exchange Rule 345 by misrepresenting the status of the account to Customer A and failing to follow specific customer instructions to close the account as described in paragraphs 2.2 through 2.7 and 4.5 above.

5.2	Hussein violated Article V, Section 4(i) made applicable to employees of member organizations by Exchange Rule 345(a)(1), in that he willfully engaged in a course of fraudulent conduct in violation of Section 10(b) of the Securities Exchange Act of 1934, and Rule 10(b)-5 thereunder by:

(a)

excessively trading and churning the Customer A account, while vested with discretionary authority, for the purpose of generating commission income, as set forth in paragraphs 2.8, 3.0, 3.1 and 4.0 through 4.5 above,

(b)

misrepresenting the status of the account to Customer A, as set forth in paragraphs 2.2 through 2.8, above, and

(c)	providing Customer A with materially false and misleading information about the status of his account as set forth in paragraphs 2.6, 2.7 and 4.5 above.

DISCIPLINARY ACTION:

A Disciplinary Panel may impose the following penalties upon Hussein:

a censure;

a fine of $25,000; and

a three months suspension from servicing any new discretionary accounts.

AMERICAN STOCK EXCHANGE, INC.

Stephen L. Lister

Senior Vice President

Agreed to this 7^th day

of March, 1991.

/s/ A. Hussein

Ahmed D. Hussein

The Middle East Paper Company (SIMO)

Ahmed Hussein was a director of SIMO. SIMO’s history and examination of its privatization and subsequent operations is a part of a study of the privatization of Egyptian companies conducted by an independent third party. The paper issued on the study is titled The Post Privatization Development of Former Law 203 Companies, 15 Case Studies, Special Study, June 2000 published and provided to the United States Agency for International Development by the CARANA Corporation (the “PCSU Report”).

Summary of the PCSU report

SIMO was established in 1945 as a private company. SIMO was nationalized in 1961 by the Egyptian Government and remained under government control until it was privatized in 1997. SIMO employed approximately 1,100 people. Prior to privatization, SIMO was managed by highly qualified line engineers and chemists and was modernized in the 1970s and 80s by General Egyptian Chemical Industries Organization and developed the largest production line of heavy cartons in the Middle East.

SIMO was privatized on June 18,1997. This transaction resulted in the sale of 85% equity that the government held in the company to private owners. The owners became the Diyya Group (headed by Ahmed Hussein) with 48%, the Khorafy Family held 22%, Holding Company for Chemical Industries (“HCCI”), which was a state institution, held 15% and 10% was held by employees. SIMO was working profitably at the time of privatization and was in a reasonable financial position.

Over the next year, the Diyya Group headed by Ahmed Hussein acquired more interest in SIMO and eventually attained 55% interest. On April 1, 1998, Ahmed Hussein became SIMO’s Chairman of the Board. The PCSU Report on pages 41 and 42 states:

Between June 1997 and April 1998, the ownership bloc headed by Ahmed Diyya Hussein (48% equity in SIMO) acquired more equity in the company, raising its stake to 55% and on April 1^st 1998, Ahmed Diyya became SIMO’s Chairman of the Board. However, during the ensuing months, corporate governance and industrial relations problems engulfed the company. SIMO was working profitably at the time of the privatization and was in reasonable financial condition – though susceptible to the volatility of price fluctuations in the international paper market. As the price for SIMO’s product began to fall on the international market, the company’s sales declined. By the end of 1998, SIMO’s profits declined sharply and the company incurred losses of 2 million LE. The company’s financial position deteriorated to the extent that its employees were not being paid their basic monthly wage during certain periods of 1998, leading to a tense atmosphere between the employees and the company’s major shareholder. (Emphasis added.)

The tense atmosphere deteriorated further as rumor began to spread quickly at the enterprise that Ahmed Diyya was now exercising the intention of closing either some – or all – of SIMO’s production line/paper factories and employ the company’s land assets for alternative commercial purposes. The tense atmosphere and the deteriorating financial position of the company reached a climax at the end of 1998 at a time when the company’s internal problems could not be resolved between its major shareholders, senior management and the employees. The HCCI, still one of the major shareholders in the company with a 15% equity stake, made a recommendation to the Musllahat Al-Sharikat (the Companies Authority in the Ministry of Economy), that SIMO’s Board of Directors (including its present Chairman, Ahmed Diyya) be temporarily suspended and that a new Chief Executive Officer (CEO) be appointed by the government to run the company. This administrative measure undertaken by the Holding Company and the Companies Authority, which effectively suspended SIMO’s Board of Directors, resulted in the removal of Ahmed Diyya from his position as SIMO’s Chairman and his replacement by a government appointed CEO, Engineer Taha Abd-Al Roba. (Emphasis added.)

***

Ahmed Hussein’s full name and some of the different permutations which appear to relate to translation and formal and abbreviated versions of his name are:

•

Ahmed Dia Hussein

•

Ahmed Diyya Hussein

•

Ahmed Diyya

Ahmed Hussein disclosed in prior proxies and SEC filings that he was a director of SIMO.

The Post Privatization Development

of Former Law 203 Companies

15 Case Studies

Special Study

June 2000

Provided to the

United States Agency for International Development

CARANA Corporation

under the

USAID Coordinating and Monitoring Services Project

Contract # PCE-1-800-97-00014-00, Task Order 800

Unless otherwise stated, opinions expressed in this document are those of the PCSU. They do not necessarily reflect those of USAID, the US Government, or the Government of Egypt.

LOGO

Table of Contents


*Introduction*			2

*Section I: Criteria for the 15 Privatized Companies into Group A, B and C*			4
Group A: Noticeably Reformed Privatized Enterprises			4
Group B: Transitional Privatized Companies			5
Group C: Slow to Reform Privatized Companies			6

*Summary Case Studies of Privatized Companies*			7

*Group A: Noticeably Reformed Privatized Companies*			8
Al Ahram Beverages Company (ABC)			8
El Nasr Bottling Company (Coke) and The Egyptian Bottling Company (Pepsi)			12

*Group B: Transitional Privatized Companies*			16

Ideal (Delta Industrial)			16
The Arab Company for Transistors and Electronics (Telemisr)			20
Electro Cables Egypt (Kabelat)			24
The Egyptian Financial Industrial Company (EFIC)			28
Kafr El Zayat Pesticides and Chemicals (KZPC)			32
Nasr City Housing			36

*Group C: Slow to Reform Privatized Companies*			40

The Middle East Paper Company (SIMO)			40
Middle & West Delta Flour Mills, East Delta Flour Mills and			44
Upper Egypt Flour Mills			44
Misr Free Shops Company			49
Al Nasr Casting			53

*Section III: Conclusions and Recommendations*			56


Post Privatization Development of Former Law 203 Companies		Draft for Review

Selection of 15 Case Studies

Group C: Slow to Reform Privatized Companies

The Middle East Paper Company (SIMO)

Background: Public Sector and Law 203

SIMO was established in 1945 as a private sector enterprise for the production of various types of paper (including duplex board, manila, and heavy grey board) and the conversion of paper and board for packaging. It was nationalized in 1961. Located in the outer Cairo suburb, Mustorid, it was one of three public sector enterprises engaged in the production of paper in Egypt.

The company was owned and operated by the Egyptian government from 1961 until its privatization in 1997. It was an affiliate of the Ministry of Industry (which also appointed the company’s Chairman) and its business was supervised for the government by the General Egyptian Chemical Industries Organization (GECIO). The company produced output to targets set by the Ministry, and cooperated with the two other public sector paper companies in meeting the government’s over-all business plan for the sector. There was no competition between the different paper companies and the price for their product was set by the government and kept below the international market price. The company itself was managed by highly qualified line engineers and chemists, was supplied by GECIO with modern machinery during the 1970s and 80s, and developed the largest production line of heavy cartons in the Middle East.

The company employed around 1100 people, whose work-place position was protected by the public sector labor codes, and like the other government enterprises discussed in this study, was well over-staffed by redundant employees. SIMO’s management had some enterprise level autonomy from the government and although the price for paper in the domestic market was set by the government, the sales and distribution

functions of SIMO’s business were to some degree decentralized from state control. The state acted as an intermediary linking SIMO’s production to would-be clients in both the public and private sectors and did not engage in the practice of bulk purchasing of SIMO’s production, as it did in the case of some of the other SOEs, particularly those in the agricultural sector.

SIMO’s business practice was further liberalized during the early to mid 1990s, when the company was re-incorporated under Law 203 and became an affiliate of the Holding Company for Chemical Industries (HCCI). Like other Law 203 state owned enterprises, SIMO was encouraged by the state to be independent both financially and in terms of management and the price for its production was no longer set by the government but was now determined by the international paper market. The company began to export some of its production to neighboring countries (it adopted the ISO for internationally recognized production standards), as well as implement labor restructuring policies (ie, undertook an early retirement program in an effort to reduce some of its redundant workforce).

Privatization: Date and Method

The company was offered by the HCCI and the National Investment Bank (co-owners of the company since 1995) through an IPO on June 18^th 1997. This transaction resulted in the sale of 85% equity that the government held in the company


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Ownership Structure/Corporate Governance

The privatization created a new ownership structure at the company, where the main stake holders in the enterprise were now:

48% to The Diyya Group

22% to The Khorafy family

15% to the Holding Company for Chemical Industries

10% to the Employees (ESA)

The transaction led to substantial re-organization on the company’s Board of Directors, including the elevation of two individuals from the Diyya Group to the Board and one from the Khorafy group. The Holding Company retained two positions on the Board (including the Chairman, Mr Moustapha Magdi) and the ESA was allocated one position. The privatization of SIMO was the first transaction effected through the capital markets where one group of private sector investors were able to take a commanding stake in a privatized SOE and appeared poised to take control over management away from the Holding Company.

Between June 1997 and April 1998, the ownership bloc headed by Ahmed Diyya Hussein (48% equity in SIMO) acquired more equity in the company, raising its stake to 55% and on April 1^st 1998, Ahmed Diyya became SIMO’s Chairman of the Board. However, during the ensuing months, corporate governance and industrial relations problems engulfed the company. SIMO was working profitably at the time of the privatization and was in reasonable financial condition - though susceptible to the volatility of price fluctuations in the international paper market. As the price for SIMO’s product began to fall on the international market, the company’s sales declined. By the end of 1998 SIMO’s profits declined sharply and the company incurred losses of 2 million LE. The company’s financial position deteriorated to the extent that its employees were not being paid their basic monthly wage during certain periods of 1998, leading to a tense atmosphere between the employees and the company’s major shareholder.

Abd Al-Roba was seconded from the National Paper Company in Alexandria (a Law 203 affiliate of the Holding Company for Chemical Industries), and was given a mandate by the government to rehabilitate SIMO’s financial status to its previous position. The measure was intended to be of a transitional nature and the government has alluded towards the intention of reinstating SIMO’s


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Board of Directors once the company’s operational and financial position is once again at a satisfactory level. However, while together the Khorafy family and the Diyya Group still maintain an equity stake amounting to around 77% of the company, under the current arrangement they are prevented from exercising any influence over SIMO’s management or major corporate level decisions. In essence, they are currently prohibited from exercising their basic rights as shareholders. This is particularly distressing for Ahmed Diyya who currently owns 55% in the company and has filed an appeals case at an industrial tribunal. The case is pending and remains unresolved to this day.

Management/Operations

As SIMO has been in essence “re-nationalized” since the end of 1998, the company has only been effectively under private sector control during the period April-December 1998 – a period which itself was hardly conducive to undertaking any serious managerial or operational restructuring. Hence there are presently no new non-government managerial appointments at the company, nor are there any evident operational adjustments resulting from the initiatives undertaken by the company’s private sector shareholders. While the government has alluded to its intention of re-instating the company’s Board of Directors, there is no tangible evidence of any plans to restructure the public sector management system which presently governs SIMO’s operations.

It is evident that Ahmed Diyya had his own vision for running the company since he began making a number of changes in management personnel after he became Chairman. However, after the administrative measures taken against him by the Holding Company and Companies Authority, these individuals have since been removed and their place taken by persons appointed by the Holding Company.

Financials

Since the removal of Ahmed Diyya from the position of Chairman of SIMO’s Board of Directors, the company’s loss making position has improved, and losses have been minimized to 150,000 LE during 1999-2000, as compared to 2 million LE during April-December 1998. There have been no new financial policies implemented at the company however and the Central Auditing Agency remains SIMO’s chief auditor, as is the case with public sector enterprises and other companies where the government holds a significant ownership stake.

New Capital Investment

There have been no new evident investments made into the company from its private sector shareholders.

Changes to Public Sector Corporate Culture

While SIMO remains in the odd position of being a private sector owned, public sector managed enterprise, its corporate culture has retained the flavor of the public sector. The company’s grounds in Mustorid, are littered by large volumes of decaying paper and other residual products and are in need of refurbishment. Management titles employed at the company reflect the status oriented political appointments made under the public sector and are still, for the most part, in


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place. The company’s employees, many of whom have spent their entire careers with the enterprise, continue to associate with the pan-public sector labor organizations and their colleagues in the two other public sector paper producing enterprises, rather than with the private sector. They continue to observe the hours of the public sector work regime. Further, it can be added that they see the HCCI (ie, the government) as a form of protection as well as representation of their interests, particularly after the manner in which their wages were with-held during Ahmed Diyya’s time as Chairman of the company, and the industrial unrest which subsequently resulted.

Given the problems that have occurred at SIMO, and its dearth of experience with the operational culture of the private sector, it is perhaps not surprising that the present CEO of the company has suggested that in developing countries like Egypt, it is important to have the public sector controlling mainstream industries which hold broad significance for society, including the paper production. The present CEO appears to be playing more the role of a civil servant than a senior level businessman, since he refers to his present position at SIMO as a transitional one, where he was asked by the Holding Company (ie, the government) to come across from the National Paper Company in Alexandria to help put things back in place for the government at SIMO, before returning back to Alexandria when the situation at SIMO returns to what the government may consider “normality”.

Labor, Wages and Compensations Packages

The basic Public Sector wages and benefits package, together with its labor and employment codes, continue to provide the base framework for employee-employer relations at the company. There have been no wage increases for SIMO’s employees outside of the automatic public sector annual increases enjoyed by employees in the public sector proper.

Concluding Comment.

The post privatization experience of SIMO gives a strong indication of the degree of power that the state can exert over majority privatized enterprises. It shows that even where the private sector gains a single majority ownership consortium within a privatized company, the state is still in a position to exercise a controlling hand in corporate governance – even if its stake in the company is substantially smaller than that of the private sector shareholders. The lack of transparency around the government’s take over of the company in late 1998, and the state of uncertainty in which it has left the company’s main shareholders is particularly distressing for a country seeking to expand its privatization program and attract foreign investment.


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Ahmed Hussein v. Dean Witter Reynolds, Inc.

In 1996, Mr. Hussein filed an arbitration demand with NASD against Dean Witter alleging breach of contract, wrongful termination, age discrimination, termination of employment in violation of Americans with Disabilities Act and defamation. Dean Witter filed an answer and counterclaim with NASD denying the charges and asserted that Hussein was terminated for violating company policy and not because of his age or any disabilities. Dean Witter contended that Hussein falsely stated in the internal questionnaire that he had no employee accounts and that Hussein was spending long periods of time outside the United States and his office which was a breach of a condition of his employment. In March 2000, the arbitration panel dismissed Mr. Hussein’s claims and Dean Witter’s counterclaims. In May 2000, Mr. Hussein petitioned the Supreme Court of the State of New York to vacate the NASD arbitration award and his petition was denied by the court.

Mr. Hussein would have you believe he voluntarily resigned from Dean Witter. Here are excerpts from the arbitration documents that show that he was terminated from his employment from Dean Witter. One of Mr. Hussein’s claims against Dean Witter was wrongful termination.

In his claim and demand letter for arbitration to NASD, Mr. Hussein’s lawyer stated:

“Claimant [Ahmed Hussein] was employed by DWR [Dean Witter Reyonds, Inc.] from approximately September 9, 1992 until he was wrongfully terminated on January 9, 1996…” (Emphasis added)

In its answer dated May 29, 1997, Dean Witter stated:

“In January 1996, Dean Witter terminated account executive Ahmed Hussein (“Hussein”) for violating company policy. In October 1995, Hussein answered “none” on a compliance questionnaire to a question which asked Hussein to list any “employee account” Hussein maintained at Dean Witter. Hussein later admitted, however, that a request submitted by Hussein’s sales assistant in November 1995 to wire one million dollars from a Dean Witter account to a Swiss bank account was actually a transaction involving Hussein’s own money.” (Emphasis added.)

JOHN J. PHELAN, III, P.C.

ATTORNEY AT LAW

1414 AVENUE OF THE AMERICAS

NEW YORK, NEW YORK 10019

(212) 688-8088

Telecopier: (212) 838-9534

December 18, 1996

Director of Arbitration

National Association of Securities Dealers, Inc.

33 Whitehall Street

New York, NY 10004

Re: Ahmed Dia Hussein v. Dean Witter Reynolds, Inc.

Dear Madame:

Claim and Demand for Arbitration

This is a Statement of Claim in Arbitration, a Demand for Arbitration and a Notice of Intention to Arbitrate. It is a claim by Mr. Ahmed Dia Hussein (“Claimant”) arising out of his employment with Dean Witter Reynolds, Inc. (“DWR”), the termination of that employment and the actions of DWR following the termination. DWR is a member organization of the Association and Claimant is a former registered representative of that

firm. DWR is obligated to arbitrate the controversies set forth herein pursuant to Section 1(2) and Section 8(a)(2) of the Association’s Code of Arbitration Procedure which rules require arbitration of disputes between member organizations and their employees or former employees regarding their employment or the termination thereof.

This arbitration is a public arbitration under the Rules of the Association and Claimant seeks a hearing before a mixed panel of three arbitrators in the City of New York. Enclosed are six copies of this Statement of Claim and exhibits together with a check payable to the Association to cover filing and the deposit on forum fees in the amount of $1,000. Also enclosed is an executed and acknowledged Uniform Submission agreement and six copies thereof.

UNLESS DWR APPLIES TO A COURT OF COMPETENT JURISDICTION TO STAY THE ARBITRATION WITHIN TWENTY DAYS OF SERVICE OF A COPY OF THIS CLAIM, IT SHALL THEREAFTER BE PRECLUDED FROM OBJECTING THAT A VALID AGREEMENT TO ARBITRATE WAS NOT MADE OR HAS NOT BEEN COMPLIED WITH AND FROM ASSERTING IN COURT THE BAR OF A LIMITATION OF TIME.

JOHN J. PHELAN, III, P.C.

Claimant seeks damages for (i) the compensation for the balance of the fourth year of his employment, in the amount of approximately $500,000 to $800,000; (ii) the productivity bonus in the amount of approximately $200,000 already earned by Claimant over the contract period from 1992 through January 9, 1996, plus the productivity bonus he would have earned had he been allowed to stay and retire at the end of 1996 or early 1997; (iii) the incentive and deferred compensation to which he would have become entitled had he not been terminated, in the amount of approximately $70,000 had he remained employed until the end of his fourth contract year on September 9, 1996; (iv) forgiveness of the balance claimed due under the final segment of a promissory note executed by Claimant in DWR’s favor at the time of his employment, amounting to approximately 2/3rds of the final $108,958.50 after adjustment for the period worked or approximately $72,639, (v) the stock options and other executive compensation benefits to which Claimant would have been entitled had his employment not been terminated in an amount to be ascertained at trial; (vi) 401(k) benefits in an amount to be determined upon the hearing of this matter; (vii) a direction to file a true and accurate Form U-5 Termination Notice in the event one has not been filed or, if one has, to correct any false and damaging characterizations placed by DWR on Claimant’s Form U-5 regarding the reasons stated for his termination; (viii) damages for defamation arising out of statements made to the industry regarding Claimant’s character, including by way of any transmittal of information set forth on his proposed Form U-5 in the amount of $1,000,000; (ix) punitive damages in the amount of $1,000,000; and attorneys’ fees and the costs of this proceeding.

Claimant’s legal theories include breach of contract, wrongful termination, age discrimination in employment, termination of employment in violation of the Americans With Disabilities Act and defamation, all of which were carried out in wilful, wanton and gross disregard of the rights of Claimant and entitle him to an award of punitive damages.

Background

Claimant is an experienced and highly successful securities broker. He has been employed as a broker since at least 1981, at all times with large New York Stock Exchange wire houses, including Prudential Bache, Oppenheimer, Smith Barney, Shearson and, finally Dean Witter. Claimant is married and is approximately 55 years of age. He was born in Egypt and educated there and in the United States. Dr. Hussein holds numerous graduate degrees from Universities both in Egypt and in the United States in multiple disciplines including scientific disciplines, mathematics, engineering and business, was a Fulbright scholar and has served as a University professor in both Egypt and the U.S.

Claimant’s business as an account executive during the 17 years he has been a broker, both at DWR and at other firms, has come principally from large clients in the Middle East, Europe and other foreign countries. His business practices have historically, up to and including his employment with DWR, been marked by considerable business travel and large transactions involving significant commission income to himself and his employer. His clients are principally wealthy individuals or institutions.

JOHN J. PHELAN, III, P.C.

DWR Employment and Terms

Claimant was employed by DWR from approximately September 9, 1992 until he was wrongfully terminated on January 9, 1996 as a pretext to avoid paying the compensation to which he was entitled to receive on the fourth anniversary of his employment. He has been unemployed since January 9, 1996.

Annexed hereto as Exhibit A is a copy of the DWR Account Executive Compensation, Benefits and Recognition Programs, described by DWR as a part of DWR’s program entitled “Our ‘Sacred Trust.’” This document sets out the formulae for the calculation of compensation for Account Executives based upon the amount of commission and other business generated by them. Page 4 of Exhibit 1 sets out the standard “payout grid” for account executives which grid increases the portion of the commissions generated by the account executive as the total gross commissions increase. In other words, the more business brought in, the higher the payout on those commissions. The term “payout” refers to the percentage of the total gross commission paid by the customer to DWR which is “paid out” to the account executive. Page 9 of the Manual sets out the “Account Executive Productivity Compensation Plan” which is also graduated and becomes higher as the account executive’s production increases. These productivity bonuses are in addition to the commissions paid to the account executives under the above payout grid and are treated as “deferred compensation” paid approximately five years after they are earned. After 1999, these bonuses are to be paid in the publicly traded stock of DWR’s parent company.

As Claimant was a highly desireable candidate at the time DWR hired him, DWR agreed to give him certain additional payments, perquisites and benefits. The Exhibit A Agreement was modified by an Addendum to Account Executive Compensation Agreement. This document

provides for incentive compensation to Claimant over and above that provided generally to its account executives under the payout grid and productivity compensation plan. Under this agreement, Claimant was to be paid on a payout plan which exceeded the payout grid payable to other account executives. These additional payments were to be treated as “incentive compensation” and were to have been paid to Claimant in the 49th month following his employment, or during October, 1996. These sums have not been paid to date. Claimant estimates they amount to no less than $48,000.

Annexed as Exhibit B is a copy of a Promissory Note from Claimant to DWR under which DWR advanced to Claimant 30% of his prior year’s production, $1,614,200, equal to $484,260, after deducting 10% (payable to him under Exhibit 4 below), leaving a net advance of $435,834. Claimant was obligated to repay this over a four year period with four payments of $108,958.50 each due on the anniversary date. These four payments were, however, under the terms of the Exhibit 3 Note to be forgiven in annual installments of the same amount, provided that Claimant remained employed, unless his employment was terminated without cause. Claimant expressly negotiated for and obtained the agreement of DWR to the “for cause” language inserted in hand on the second page of the Note and initialled by the parties. The first three installments have been forgiven under the terms of the Note but DWR contends that the final installment of $108,958.50

JOHN J. PHELAN, III, P.C.

is due to them from Claimant. In view of the unjustified tiring of Claimant, this must be treated as forgiven as well. At the very least, Claimant is entitled to a pro rata adjustment of the final segment of the note in his favor for the portion of the 1995-1996 year during which he worked for DWR.

Annexed hereto as Exhibit C is a one paragraph letter dated September 9, 1992 which agrees to pay to Claimant the additional $48,426 withheld under the above Promissory Note on September 9,1996, provided that Claimant remained employed on that date. DWR’s wrongful and unjustified termination of Claimant’s employment has prevented him from obtaining this payment as well.

Termination of Employment and Pretextual Reasons

On January 9, 1996, DWR terminated Claimant’s employment. Normally, promptly following termination, DWR and any other industry employer is required to file a Form U-5 with the Central Registration Depository which provided copies to the Association, all exchanges and State regulators with which Claimant was registered or licensed. DWR, for reasons which are unexplained, has failed or neglected to do so. Instead, it has prepared a draft U-5 which it sent to Claimant’s former counsel and which threatened to state as the reason for termination that “Mr. Hussein’s response to an internal questionnaire did not identify a Dean Witter account containing Mr. Hussein’s funds which account was carried on the firm’s books and records in the name of a financial institution”. Claimant believed until recently that the proposed Form U-5 had indeed been filed as DWR was obliged to do.

As the Form U-5 is necessarily read by any employer considering hiring Claimant and by any regulator considering his application for registration, such statements on this critical document accusing him of lying to his firm, concealing his interest in a customer account and, perhaps, somehow contributing to the falsification of the firm’s books and records; in other words, of extremely dishonest conduct, would be extremely damaging and, indeed, devasting documents. Because of his belief that the U-5 had been filed and due to his forthright approach to business dealings and his wish not to be seen by any business associate to be concealing any information, he made disclosure of the fact that a damaging Form U-5 was filed against his record. These disclosures have cost him numerous business opportunities. Even the absence of a filed U-5 is damaging to Claimant sice it clearly raises the spectre of an ongoing investigation in the minds of anyone to whose attention this failure comes and places Claimant in potential regulatory difficulties with sever possible consequences.

Statements in any Form U-5 alleging what the draft U-5 stated would be absolutely false and would be known to DWR to be absolutely false. As DWR knows, Mr. Hussein had discussed the account in question many times with his supervisors and they knew he had opened an account for that institutional customer and that he maintained an account with that institution. Nothing was concealed and was, indeed, affirmatively disclosed. Regular requests were made of Claimant by his supervisors for copies of the account statements of the institution in question. They were always promptly provided and were reviewed by management. He had even discussed the very answer to the questionnaire item with them and had sought their advice as to the proper answer given the

JOHN J. PHELAN, III, P.C.

circumstances. At all times, Claimant made full disclosure and had answered all questionnaire items fully and accurately, as he understood their requirements after discussing them with supervisors. Claims made at termination and thereafter of other supposed facts are fabrications made for the illegitimate purposes discussed below.

Actual Reason for Termination

Contrary to the reasons stated for termination, the real reason is the exact opposite, a reason which demonstrates both Claimant’s honesty and DWR’s improper motives. In late 1995, Claimant discussed with his superios at DWR his thoughts concerning his career plans. He advised them that, as he was getting older and because of his health conditions (severe and acute bronchitis and severe sleep apnea), he would likely not continue to work for DWR for much longer after he had completed the four years in September, 1996 and that he planned to retire as a registered representative. Indeed, Claimant’s physicians were advising him to retire. Shortly thereafter, despite very substantial commission production, he was terminated. Since he had substantial benefits coming to him under the various agreements annexed hereto as Exhibits 1 through 4 provided only that he survive as an employee and be allowed to retire at the end of 1996 or early 1997 or, alternatively, that his employment was terminated prior thereto without cause, DWR determined to terminate Claimant and to create a false “cause” for the termination. In other words, Claimant’s only fault was in being too honest. He shared with his employer his ruminations regarding his future plans. They decided that they had no need to try to keep him happy any longer, they had a short term financial advantage to be gained by terminating him and that they needed a reason, a “cause” to do so.

This shoddy and immoral employment termination and grab for Mr. Hussein’s well earned compensation benefits is bad enough. To go beyond that and to scar his name for the rest of his life by placing the false accusations on the Form U-5 would place this matter into the area of defamation and punitive damages.

Since January 9, 1996, Claimant has been unable to secure employment in the industry. He has been informed by at least one major client that any accusation on his proposed Form U-5 alleging dishonest conduct would prevent them from dealing with him any further. Claimant believes that by word of mouth or otherwise, he has been damaged in his business life.

Demand

Claimant seeks damages in the amount of $1,020,000 or such amount as is established at trial, for his lost compensation, amounts due him under the firm’s 401(k) and other benefit plans, the forgiveness of any balance claimed due on his note, $1,000,000 for the defamation claim; and a direction to DWR to file a true and accurate Form U-5 or, in the event one has not been filed, to amend his U-5 regarding the reason for termination. Claimant also seeks punitive damages in the amount of $1,000,000 and his attorneys’ fees and the costs of this proceeding.

JOHN J. PHELAN, III, P.C.

Claimant requests the appointment of a panel of arbitrators and the convening of hearings at the earliest possible dates.

Very truly yours,

/s/ John J. Phelan, III

John J. Phelan, III

cc:	Edward W. Larkin, Esq.

Dean Witter Reynolds, Inc.


AHMED [ILLEGIBLE] HUSSEIN,

	Claimant,

v.

DEAN WITTER REYNOLDS INC.,

	Respondent.

		/

DEAN WITTER REYNOLDS INC.’S

ANSWER, AFFIRMATIVE DEFENSES AND COUNTERCLAIM

Respondent, Dean Witter Reynolds Inc. (“Dean Witter”) through its undersigned attorneys, submits its Answer, Affirmative Defenses and Counterclaim to Claimant Ahmed Hussein’s (“Hussein”) Statement of Claim (“Claim”) and states:

Introduction

In January 1996, Dean Witter terminated account executive Ahmed Hussein (“Hussein”) for violating company policy. In October 1995, Hussein answered “none” on a compliance questionnaire to a question which asked Hussein to list any “employee account” Hussein maintained at Dean Witter. Hussein later admitted, however, that a request submitted by Hussein’s sales assistant in November 1995 to wire one million dollars from a Dean Witter account to a Swiss bank account was actually a transaction involving Hussein’s own money. In addition to failing to disclose the true nature of this account to Dean Witter, Hussein continued to spend long periods of time outside the office and outside the United States after being warned by his branch manager that Hussein’s regular attendance in the branch office was a condition of his employment. Hussein was terminated by his branch manager for these violations.

STEEL HECTOR & DAVIS LLP

[ILLEGIBLE TEXT]

Equally as frivolous, Hussein also states that Dean Witter “defamed” Hussein in a draft regulatory filing which, remarkably, was shown to no one other than Hussein and his attorneys.

Hussein’s Claim is nothing more than an attempt to circumvent New York’s long standing “employment-at-will” rule by couching what would otherwise be “wrongful discharge” claims as claims sounding in tort and discrimination. Under the law of New York, absent a statutory or contractual restriction, an employee is deemed to be employed “at will” by his employer, and may be terminated at any time, for any reason, provided it is not an unlawful reason. See, e.g., Murphy v. American Home Products Corp., 58 N.Y. 2d 293, 461 N.Y.S. 232 (N.Y. 1983). Thus, under the “at will” doctrine followed by New York, an action for “wrongful termination” does not exist. Id.

Indeed, Hussein’s own Dean Witter employment application specifically acknowledged Dean Witter’s right to terminate Hussein with or without cause. Hussein’s employment application discloses above his signature:

I also agree that my employment and compensation can be terminated with or without cause and with or without notice, at any time, at the option of either Dean Witter Reynolds, Inc. or myself.

See Employment Application, Exhibit A, p.4, (emphasis added).

Hussein’s Claim appears to be nothing more that an attempt to coerce Dean Witter from pursuing an arbitration claim against Hussein for the unpaid balance of a Promissory Note

STEEL HECTOR & DAVIS LLP

[ILLEGIBLE TEXT].

Hussein Was Terminated for Violating Company Policy

Hussein was terminated because he violated company policy, not because of his age, his alleged “disability” or because Dean Witter wanted to retain Hussein’s deferred compensation. As set forth below, Hussein improperly responded to a compliance inquiry, and his lack of attendance in the office was unacceptable.

In 1995, Dean Witter’s World Trade Center branch office circulated an internal questionnaire to be completed by all brokers. One of the questions asked whether the account executive maintained any “employee” accounts. Hussein answered “none.” See Exhibit “B.” The firm later discovered that Hussein’s answer was not true when Hussein attempted to transfer one million dollars $1,000,000 out of a Dean Witter account to a Swiss bank account for his own benefit, and admitted that the funds in the Dean Witter account were his own.

Pursuant to Dean Witter policy, an account executive who opens a Dean Witter account in which he or any member of his family has an interest must disclose such interest to the firm. The Dean Witter New Account Form asks whether each account opened is an “employee” or “employee related” account. An “employee account” includes every account in which an employee of Dean Witter has an interest. In addition, Dean Witter policy prohibits an account executive from maintaining a securities account at another brokerage firm or bank in which the account executive has any direct or indirect interest without prior written approval from Dean Witter’s Compliance Department.

STEEL HECTOR & DAVIS LLP

[ILLEGIBLE TEXT]

employees’ accounts in order to assure compliance with employee trading regulations set by the various securities regulators. For example, the NASD Rules of Fair Practice prohibit an account executive from purchasing what is known as a “hot issue” for his own account. Likewise, employees are restricted from engaging in transactions for their own accounts involving certain securities which Dean Witter acts as a member of an underwriting syndicate. Dean Witter’s own policies and procedures restrict additional securities transactions by its employees to avoid potential conflicts of interest between the employee and the firm’s clients. Quite simply, Dean Witter cannot adequately supervise its employees’ securities transactions and insure compliance with these rules, regulations and policies unless the firm is aware of its employees’ accounts.

In Hussein’s case, an additional reason existed. In January 1994, the firm received a Notice of Levy from the IRS stating that Hussein was the subject of a federal tax lien in the amount of $727,148.48. As required by the Notice of Levy, Dean Witter “froze” Hussein’s regular Dean Witter account, as well as his IRA account, pending their liquidation to satisfy the levy. Curiously, however, Hussein had already liquidated his Dean Witter personal account only days before Dean Witter received the Notice of Levy, transferring personal assets in excess of a half a million dollars out of Dean Witter and leaving less than $2,000 in Hussein’s regular account to satisfy the IRS lien.¹

¹	Hussein did not liquidate his IRA account prior to Dean Witter’s receipt of the Notice of Levy.

STEEL HECTOR & DAVIS LLP

[MISSING TEXT]

the balance of his IRA account in response to the Levy. During that time, however, the firm was placed in a precarious position in that the IRS commanded compliance with the terms of the Levy, while Hussein’s attorneys wrote his branch office manager and threatened to take legal action against the firm if Dean Witter liquidated Hussein’s IRA account.²

Given the existing tax lien and Dean Witter’s obligation to abide by the terms of the Levy, the firm in Hussein’s case had an even greater need to ensure that the account executive was being forthright with respect to disclosure of those accounts which contained Hussein’s personal funds.

In July 1995, Hussein submitted paperwork, as an account executive, to open a Dean Witter account for the “Arab Bank (Switzerland) Ltd.” The account was assigned number 601- 20931-070. Hussein did not advise his branch office manager or the office compliance manager that he had an interest in the account. Nor did Hussein designate the Arab Bank account as a Dean Witter “employee account.” In fact, the space on the Arab Bank account’s New Account Form which asks whether the account is for a Dean Witter employee is marked “no.” See Exhibit “C.”

The firm, however, began to have concerns regarding this account. Prior to being served with notice of the tax levy, Dean Witter had approved Hussein’s maintenance of a personal account at another Swiss bank, “Banque Alliance.” Bank Alliance had also opened a Dean Witter account with Hussein acting as account executive. The approval of Hussein’s personal

²	In fact, this was not the only time Hussein and/or his attorneys threatened to sue his employer. While he was an account executive, Hussein on several occasions boasted to his branch manager that he eventually would sue the firm.

STEEL HECTOR & DAVIS LLP

[ILLEGIBLE TEXT].

Witter Exhibit “E.” In July 1995, Hussein’s branch manager wrote Hussein a memo reminding him that an account executive cannot be continuously absent from the office and asking Hussein to give the firm a definitive date in August 1995 for his return to the United States. See Exhibit “F.”

In October 1995, Hussein completed an internal questionnaire regarding various compliance issues. In response to a question requesting that the broker disclose all “employee accounts,” Hussein wrote “none.” See Exhibit “B.” In November 1995, however, Hussein instructed his sales assistant to submit a Wire Request Form to Dean Witter. The wire request instructed that one million dollars ($1,000,000) was to be wired from the Arab Bank’s Dean Witter account to a Swiss bank account. Because of the curious nature of the request and the lack of an authorized signature from an agent of the Arab Bank authorizing the transfer, the branch operations manager would not process the wire request. Over the next few days, Hussein’s sales assistant submitted subsequent, similar wire requests, one of which stated that the “final beneficiary” of the one million dollars was “Ahemd Hussein” while others stated that the final beneficiary was simply the Swiss bank. See Composite Exhibit “G.”

An investigation of the proposed transaction and the Arab Bank’s account followed, to determine both the true nature of the account and whether the assets in the account were subject to the IRS lien. Dean Witter spoke to Hussein (who was again out of the country) by telephone with Hussein’s attorney on the line. Although he was vague, Hussein ultimately admitted that the Arab Bank’s Dean Witter account contained Hussein’s own funds. He nevertheless argued

STEEL HECTOR & DAVIS LLP

[ILLEGIBLE TEXT].

Dean Witter ultimately concluded that the funds in the Arab Bank account were acquired after service of the Notice of Levy, and therefore, were not subject to the Levy. As such, Dean Witter wired the funds out according to Hussein’s instructions. Nevertheless, Dean Witter as a result of the foregoing reasonably concluded that Hussein incorrectly answered the compliance questionnaire, incorrectly filled out the Arab Bank account’s New Account Form, and concealed from Dean Witter the true nature of the account.

Contrary to what is alleged in the Claim, although Dean Witter became increasingly suspicious about the Arab Bank account, the firm did not know that the funds were Hussein’s until Hussein ultimately admitted as such in November or December 1995. Likewise, Hussein did not seek advice from the firm on how to answer the questionnaire item at issue. Had he disclosed that the funds were his own, the firm would have required him to disclose on the questionnaire that the Arab Bank account was a Dean Witter “employee account.”

As a result of this incident, and based on Hussein’s continued absence from the office, Hussein’s branch manager on January 9, 1995 called Hussein and told him he was being discharged for cause for the reasons outlined above. Significantly, in response to being terminated, Hussein simply said “ok” and hung up the phone. He did not argue, as he does now, that his manager’s stated reasons were false, that medical problems or his age caused his termination, or that his termination was a ruse to retain Hussein’s deferred compensation.

Hussein was well aware that Dean Witter could legally terminate his employment with or without cause. Hussein’s claim that his discharge was an attempt to avoid payment of his

STEEL HECTOR & DAVIS LLP

[ILLEGIBLE TEXT].

$435,834. That Dean Witter would expend significant money recruiting Hussein to join the firm only to terminate him three years later is nonsensical. To be blunt, if Dean Witter’s decision to retain or discharge Hussein was exclusively a financial one, the firm surely would have kept Hussein and benefited from the commissions he generated. Hussein’s violation of Dean Witter’s policies, not his terms of compensation, necessitated his discharge.

Hussein’s Charge of Age Discrimination (ADEA) is Frivolous

To deflect attention away from the true reasons for Hussein’s termination, Hussein alleges (without any supporting facts) that his discharge was motivated by discrimination based on Hussein’s age, assumably in violation of the Age Discrimination in Employment Act of 1967 (“ADEA”). This is simply untrue. Hussein was hired by Dean Witter in 1992 and was discharged three years later in 1995. Hussein was approximately fifty years old at the time Dean Witter hired him. If Dean Witter sought to discriminate against older account executives, why would the firm hire Mr. Hussein, who at the time they hired him was already within the ADEA’s protected class (individuals over forty)? Hussein expects this Panel to believe that Dean Witter fired Hussein because he was fifty-three, yet the firm hired Hussein when he was fifty!

Hussein’s ADA Claim is Equally Without Merit

Equally as frivolous as his ADEA claim, Hussein also alleges that Dean Witter’s decision to terminate him was motivated by discrimination based on Hussein’s purported “bronchitis” or “sleep apnea” in violation of the Americans with Disabilities Act (“ADA”). Hussein’s ADA allegations are completely false. During his employment and at the time of the decision to

STEEL HECTOR & DAVIS LLP

[ILLEGIBLE TEXT].

was within the protected group as a “qualified individual with a disability” (i.e., that Hussein experiences a physical or mental impairment that substantially limits one or more of the major life activities of such individual”) as required to state a claim under the ADA. Regardless, regular, predictable attendance at the firm is an essential function of a Dean Witter account executive. Account executives cannot properly service clients and their accounts, and the firm cannot perform its required supervisory responsibilities of its registered representatives if they are unavailable.

Finally, Hussein’s ADA claim also fails because, at the time of his discharge, Hussein was not performing his job at a level that met Dean Witter’s legitimate expectations, given Hussein’s failure to properly disclose the true nature of the Arab Bank account and Hussein’s irregular attendance. Quite simply, Dean Witter had a legitimate non-discriminatory reason for discharging Hussein.

In short, simply establishing that Hussein is fifty-five and has bronchitis or sleep apnea does not subject Dean Witter to liability for employment discrimination. Federal courts consistently dismiss lawsuits under anti-discrimination statutes where no evidence of an employer’s discriminatory intent exists. Likewise, the Panel here should dismiss the unsupported, frivolous allegations of employment discrimination in Hussein’s Claim.

Dean Witter Did Not Defame Hussein

Finally, Hussein also alleges that Dean Witter and its in-house attorney, Mr. Edward Larkin, defamed Hussein by submitting false information to the National Association of Securities Dealers, Inc. (“NASD”) regarding the reasons for Hussein’s termination. Quite the

STEEL HECTOR & DAVIS LLP

[ILLEGIBLE TEXT]

language Dean Witter ultimately reported to the NASD. The fact that the document Hussein is complaining about was a “draft” version of his U-5 which was never submitted to the NASD or “published” to third parties other than Hussein and his attorneys drives home the frivolousness of Hussein’s “defamation” claim!

The U-5 Reporting Requirement

One of the self-regulatory functions undertaken by the NASD is the investigation of terminations for cause. Accordingly, the NASD requires member firms such as Dean Witter to notify the association of the circumstances surrounding an account executive’s discharge. See NASD Bylaws, Article IV § 3(a), NASD Manual at 1050 (1996). The required disclosure form, known as a Uniform Termination Notice for Securities Industry Registration, or “Form U-5,” contains questions concerning the individual’s termination date, the reason for his termination, and requests other information concerning the broker while employed with the firm. See Form U-5 for Hussein, attached as Exhibit “H.”

The Reported Reason for Hussein’s Termination is True

After Hussein’s discharge, Dean Witter submitted a U-5 to the NASD that stated that Hussein was “discharged.” As for the section that asks for the “reason for termination,” Dean Witter left that section blank except for the words “amendment to follow.” See Exhibit H. Mr. Larkin also wrote to the NASD and explained that he had requested input from Hussein and his counsel with respect to the “reason for discharge” section and would submit an amendment. On

STEEL HECTOR & DAVIS LLP

[ILLEGIBLE TEXT].

To state a defamation claim against Dean Witter arising out of Dean Witter’s statements on his U-5, Hussein must show that the information Dean Witter reported was maliciously false. Stated succinctly, there is nothing false about the statement that Dean Witter discharged Hussein for “policy reasons unrelated to transactions in customer accounts.” Likewise, rather than acting with malice, Mr. Larkin went out of his way to solicit Hussein’s own input as to the language submitted to the NASD.

In an act of desperation, Hussein references in his Claim language from a previous “draft” U-5 proposed by Mr. Larkin and submitted to Hussein and his attorney for review. As Hussein states in his Claim, the draft U-5 proposed that the stated reason for Hussein’s discharge would read: “Mr. Hussein’s response to an internal questionnaire did not identify a Dean Witter account containing Mr. Hussein’s funds which account was carried on the firm’s books and records in the name of a financial institution.” Claim, p. 4. Again, there is nothing false or malicious about this statement. Moreover, the draft U-5 in question cannot as a matter of law form the basis of a defamation claim against Dean Witter as the firm did not publish this document to third parties. Rather, Mr. Larkin only provided the document to Hussein and his counsel.

Furthermore, Hussein’s claim that he essentially “defamed himself’ by disclosing to prospective employers the language of the draft U-5 is not credible. Hussein and his counsel knew quite well that Dean Witter had not submitted the draft U-5 to the NASD, and that the only U-5 filed by Dean Witter prior to the April 4 amendment listed the reason for Hussein’s termination as “amendment to follow.” In short, Hussein’s defamation claims are spurious.

STEEL HECTOR & DAVIS LLP

1. [ILLEGIBLE TEXT] and, therefore must be dismissed.

2. Hussein’s Claim is barred by the doctrine of unclean hands.

3. Hussein cannot recover on his defamation claims based on the truth of the statements upon which his claims are based.

4. Hussein cannot recover on his defamation claims because the statements about which he complains are privileged.

5. Hussein cannot recover on his defamation claims because the statements about which he complains were made in good faith without malice.

6. Hussein cannot recover on his wrongful termination claim because such a claim is not recognized by the state of New York.

7. Hussein’s damages, if any, are the result of Hussein’s own conduct and not that of the respondent.

8. Hussein’s breach of contract claims, if any, are barred by the doctrine of merger and by the parole evidence rule.

9. Without conceding that Hussein has suffered any damages as a result of any purported wrongdoing by Dean Witter, Hussein has failed to mitigate his damages.

10 All employment decisions regarding or affecting Hussein were based on legitimate business decisions and were in no way related to Hussein’s age or purported disability, or any discriminatory motive on the part of Dean Witter.

STEEL HECTOR & DAVIS LLP

[ILLEGIBLE TEXT]

12. Hussein failed to take proper advantage of the internal grievance procedures established by Dean Witter with respect to employment discrimination. Such procedures were provided to Hussein in writing, and Dean Witter expressly encouraged its employees to utilize such procedures.

13. To the extent that Hussein alleges intentional unlawful discrimination by Dean Witter employees, any such conduct would have been contrary to Dean Witter’s express written policy against discrimination and thus would be beyond the scope of any actual or apparent authority possessed by such employees.

14. Dean Witter is entitled to set-off in the amount of the balance of the promissory note and incentive compensation payable by Claimant to Dean Witter.

15. Dean Witter reserves the right to assert additional affirmative defenses that may become appropriate as the discovery in this case develops.

COUNTERCLAIM

COUNT I - BREACH OF EMPLOYMENT CONTRACT

1. For value received, on September 9, 1992 Hussein executed and delivered to Dean Witter a Promissory Note (the “Note”) in the principal amount of $435,834, payable in four (4) installments. A copy of the Note is attached as Exhibit “J”. At the time of execution of the Note, Hussein also executed and delivered to Dean Witter a Promissory Note Acknowledgment Form (the “Acknowledgment”), a copy of which is attached as Exhibit “K”.

STEEL HECTOR & DAVIS LLP

[ILLEGIBLE TEXT]

due and payable, without notice or demand, if the employee is terminated for cause prior to the due date of the Note. See Exhibit “J”, page 2. The terms of the Note also state that a default in payment of the Note occurs “upon the employee’s termination of employment for any reason prior to repayment in full of the Note.” See Exhibit “J”, page 2.

3 Likewise, the Acknowledgment signed by Hussein provides, inter alia, that “if I terminate or am terminated for any reason, all outstanding principal and interest under the Note will become immediately due and payable to Dean Witter.” See Exhibit “K”, ¶ 1.

4. Hussein was terminated for cause from Dean Witter effective January 9, 1995 at which time all outstanding amounts of principal under the Note, plus accrued interest at the contract rate, become immediately due and payable to Dean Witter.

5. By executing the Note, Hussein further agreed to reimburse Dean Witter for any and all damages, losses, costs and expenses (including attorney’s fees and court costs) incurred or sustained by Dean Witter as a result of the breach of the terms of the Note. See Exhibit “J”, page 2.

6. As of the date of filing this claim, Hussein has not reimbursed Dean Witter for the balance due.

WHEREFORE, Dean Witter respectfully requests that it be awarded the following damages:

(a)

The amount of principal and interest due and owing under the Note, to be established at the arbitration.

STEEL HECTOR & DAVIS LLP

[ILLEGIBLE TEXT]

(c)

The costs of this arbitration, including attorney’s fees.

(d)

Any other relief deemed appropriate by the Panel.

COUNT II - BREACH OF INCENTIVE COMPENSATION AGREEMENT

7. Hussein on September 9, 1992 executed an Incentive Compensation Agreement with Dean Witter, attached as Exhibit “E.” As consideration for Dean Witter’s employment and compensation, Hussein agreed to the following liquidated damages provision:

Termination and Damage for Breach. Employee recognizes that Dean Witter may expend substantial amounts in connection with employee’s employment hereunder and that it will be difficult to ascertain with precision the amount of damages Dean Witter will incur if employee voluntarily leaves his employment, or is terminated for cause. Therefore, if employee voluntarily leaves his employment with Dean Witter, or is terminated for cause, Dean Witter shall be entitled to recover, and employee shall pay Dean Witter as liquidated damages, an amount equal to the incentive compensation paid to employees pursuant to paragraph 2 and the Addendum hereto, said amount to be reduced by 1/48th for each month employee was employed by Dean Witter. The above liquidated damages shall not constitute liquidated damages to Dean Witter for other breaches of this Agreement.

Exhibit “E”, page 2, ¶ 7.

8. Pursuant to the Addendum to Hussein’s Incentive Compensation Agreement, attached as Exhibit “L”, any amount of compensation received by Hussein in excess of Dean Witter’s prevailing compensations rates for Dean Witter account executives constituted premium payment deemed “incentive compensation.”

STEEL HECTOR & DAVIS LLP

[ILLEGIBLE TEXT]

Witter is entitled to an award of liquidated damages against Hussein as set forth in his Incentive Compensation Agreement.

10. The liquid damages provision contained in the contract is reasonable.

WHEREFORE, Dean Witter respectfully requests that the arbitrators enter an award of liquidated damages in accordance with the formula set forth in ¶ 7 of Hussein’s Incentive Compensation Agreement in favor of Dean Witter, the amount to be established at arbitration.

Bradford D. Kaufman, Fla Bar #655465

Anne Tennant Cooney, Fla Bar #986852

STEEL HECTOR & DAVIS LLP

777 South Flagler Drive, Suite 1900

West Palm Beach, FL 33401-6198

Phone (407) 650-7200; Fax 655-1509

Attorneys for Dean Witter Reynolds Inc.

CERTIFICATE OF SERVICE

I certify that a copy hereof was served by U.S. Mail on May 29, 1997 on:

John J. Phelan III, Esq.

1414 Avenue of the Americas

New York, New York 10019

original & 3 copies by Fedex to:

James C. Madan, Legal Assistant

National Association of Securities Dealers, Inc.

125 Broad Street, 36th Floor

New York, New York 10004

/s/ Bradford D. Kaufman

Bradford D. Kaufman

Award

NASD Regulation, Inc.

In the Matter of the Arbitration Between:

Ahmed Dia Hussein, (Claimant) vs. Dean Witter Reynolds, Inc., (Respondent)


Case Number: 96-05764		Hearing Site: New York, NY

REPRESENTATION OF PARTIES

Claimant, Ahmed Dia Hussein, hereinafter “Claimant”: John J. Phelan, Esq., New York, NY.

Respondent, Dean Witter Reynolds, Inc., hereinafter referred to as “Respondent”: Bradford D. Kaufman, Esq., Greenberg Traurig, P.A., West Palm Beach, FL.

CASE INFORMATION

Statement of Claim filed on or about: December 18, 1996.

Claimant signed the Uniform Submission Agreement: March 24, 1997.

Reply filed on or about: June 23, 1997.

Statement of Answer and Counterclaim filed by Respondent on or about: May 29, 1997.

Respondent did not sign the Uniform Submission Agreement.

CASE SUMMARY

Claimant asserted the following causes of action: breach of contract; wrongful termination; age discrimination in employment; termination of employment in violation of the Americans with Disabilities Act; and defamation.

Unless specifically admitted in its Answer, Respondent denied the allegations made in the Statement of Claim and asserted the following defenses: Claimant failed to state a claim upon which relief can be granted; doctrine of unclean hands; information contained in Claimant’s Form U-5 is true; information contained in Claimant’s Form U-5 is privileged; statements contained in Claimant’s Form U-5 were made in good faith without malice; wrongful termination is not recognized by New York law; Claimant is the sole cause of any damages he suffered; Claimant’s breach of contract claims are barred by the doctrine of merger and the parole evidence rule; failure to mitigate damages; Claimant was terminated for legitimate business reasons that were not related to age, disability, or discrimination; Claimant failed to exhaust all administrative remedies prior to instituting this arbitration, as required by the ADA and ADEA; Claimant failed to take proper advantage of Respondent’s internal grievance procedures; and, any unlawful discrimination alleged to have been

NASD Regulation, Inc. Office of Dispute Resolution

Arbitration No. 96-05764

Award Page 2

perpetrated by Dean Witter Reynolds’ employees would have been contrary to Respondent’s express written policy, and therefore, would be beyond the scope of such employees’ actual or apparent authority.

In its Counterclaim, Respondent alleged breach of an employment agreement; and breach of an incentive compensation agreement.

RELIEF REQUESTED

Claimant requested an award granting him damages in the amount of $1,020,000.00, or such amount as is established during the proceedings, for his lost compensation, amounts due him under Respondent’s 401(k) and other benefit plans; the forgiveness of any balance claimed due on the

note; $1,000,000.00 for the defamation claim; a direction to Respondent to file a true and accurate form U-5 or, in the event that one has not been filed, to amend Claimant’s U-5 regarding the reason for his termination; punitive damages in the amount of $1,000,000.00; and attorneys’ fees and the costs of this proceeding.

Respondent requested a judgment dismissing the Statement of Claim in its entirety; the amount of principle and interest due and owing under the promissory note; accrued interest at the contract rate from the date of Claimant’s termination through the date of the award; liquidated damages; the costs of this proceeding, including attorneys’ fees; and, any other and further relief as the Panel may deem just and proper.

OTHER ISSUES CONSIDERED AND DECIDED

During the hearings conducted in this matter, Claimant made a Motion to Preclude Respondent’s Motion to Dismiss which was denied by the Panel.

During the hearings conducted in this matter, Respondent made a Motion to Dismiss which was granted by the Panel.

The Panel denied Claimant’s Motion to Recuse.

Respondent did not file with the NASD Regulation, Inc. Office of Dispute Resolution a properly executed submission to arbitration but is required to submit to arbitration pursuant to the Code and, having answered the claim, appeared and testified at the hearing, is bound by the determination of the Panel on all issues submitted.

The parties have agreed that the Award in this matter may be executed in counterpart copies or that a handwritten, signed Award may be entered.

NASD Regulation, Inc. Office of Dispute Resolution

Arbitration No. 96-05764

Award Page 3

AWARD

After considering the pleadings, the testimony and evidence presented at the hearing, the Panel has decided in full and final resolution of the issues submitted for determination as follows:

1.	Claimant’s claims are hereby dismissed in their entirety.

2.	Respondent’s Counterclaim is hereby dismissed in its entirety.

3.	Respondent must re-draft Claimant’s Form U-5, Section 12 to read “Mr. Hussein’s initial response to an internal questionnaire was not satisfactory to Dean Witter Reynolds and Dean Witter Reynolds failed to request clarification from Mr. Hussein.”

4.	All other requests for relief are hereby denied.

FEES

Pursuant to the Code, the following fees are assessed:

Filing Fees

NASD Regulation, Inc. will retain or collect the non-refundable filing fees for each claim:


Initial claim filing fee	= $	500.00

Counter claim filing fee	= $	500.00

Member Fees

Member fees are assessed to each member firm that is a party in these proceedings or to the member firm that employed the associated person at the time of the events giving rise to the dispute. In this matter, Dean Witter Reynolds is a party.


Member surcharge		= $	500.00

Adjournment Fees

Adjournments requested during these proceedings:


April 9, 1999		= $	1,000.00

The Panel assessed this entire adjournment fee against Respondent.


August 10, 11, 17 and 18, 1999			= waived

NASD Regulation, Inc. Office of Dispute Resolution

Arbitration No. 96-05764

Award Page 4

Forum Fees and Assessments

The Panel assesses forum fees for each hearing session conducted. A hearing session is any meeting between the parties and the arbitrators, including a pre-hearing conference with the arbitrators, that lasts four (4) hours or less. Fees associated with these proceedings are:


Three (3) Pre-hearing sessions with a single arbitrator x $300.00			= $	900.00

Pre-hearing conferences:	March 23, 1999	1 session

	April 9, 1999	1 session

	August 23, 1999	1 session


Four (4) Pre-hearing sessions with Panel x $1,000.00			= $	4,000.00

Pre-hearing conferences:	August 11, 1998	1 session

	April 9, 1999	1 session

	November 5, 1999	1 session

	February 10, 2000	1 session


Five (5) Hearing sessions x $1,000.00			= $	5,000.00

Hearing Dates:	September 8, 1999	2 sessions

	September 9, 1999	2 sessions

	November 16, 1999	1 session


Total Forum Fees			= $	9,900.00

1.	The Panel has assessed $4,950.00 of the forum fees against Claimant.

2.	The Panel has assessed $4,950.00 of the forum fees against Respondent.

Fee Summary

1.	Claimant be and hereby is solely liable for:


Initial Filing Fee	= $	500.00

Forum Fees	= $	4,950.00


Total Fees	= $	5,450.00

Less payments	= $	1,500.00


Balance Due NASD Regulation, Inc.	= $	3,950.00

NASD Regulation, Inc. Office of Dispute Resolution

Arbitration No. 96-05764

Award Page 5

2.	Respondent be and hereby is solely liable for:


Counterclaim Filing Fee	= $	500.00

Member Fees	= $	500.00

Adjournment Fee	= $	1,000.00

Forum Fees	= $	4,950.00



Total Fees	= $	6,950.00

Less payments	= $	3,500.00


Balance Due NASD Regulation, Inc.	= $	3,450.00

All balances are due and payable to NASD Regulation, Inc.

NASD Regulation, Inc. Office of Dispute Resolution

Arbitration No. 96-05764

Award Page 7

Concurring Arbitrators’ Signatures

I, the undersigned arbitrator, do hereby affirm, pursuant to Article 7507 of the Civil Practice Law and Rules, that I am the individual described herein and who executed this instrument which is my award.


/s/ Michael Forster Pisapia

Michael Forster Pisapia, Esq.				Signature Date

Public Arbitrator, Presiding Chair


Howard D. Jacob				Signature Date

Public Arbitrator


Theodore Brown				Signature Date

Industry Arbitrator

March 16, 2000


Date of Service (For NASD office use only)

NASD Regulation, Inc. Office of Dispute Resolution

Arbitration No. 96-05764

Award Page 8

Concurring Arbitrators’ Signatures



Michael Forster Pisapia, Esq.				Signature Date

Public Arbitrator, Presiding Chair

/s/ Howard D. Jacob				3/“illegible”/2000


Howard D. Jacob				Signature Date

Public Arbitrator


Theodore Brown				Signature Date

Industry Arbitrator

March 16, 2000


Date of Service (For NASD office use only)

Underpaid taxes by Mr. Hussein of approximately $700,000

Mr. Hussein underpaid his income taxes in 1983 and 1984. The IRS tried to seize his property and garnish his wages to satisfy the unpaid taxes. Mr. Hussein’s application to enjoin the IRS from seizing his property was denied and the parties agreed to enter into a settlement. At a later time, the government tried to collect from Mr. Hussein certain amounts in respect of his unpaid 1983 and 1984 income taxes. Mr. Hussein lost a preliminary proceeding, but appealed to the Second Circuit Court of Appeals, alleging that the statute of limitation had expired on the claims. The Court of Appeals ruled that the statute of limitation had expired for the 1983 taxes, but that it had not expired for the 1984 taxes.

Mr. Hussein would have you believe that he paid his 1983 and 1984 taxes in full, but the excerpts below show otherwise.

In the transcript of the trial where Mr. Hussein tried to prevent IRS from seizing his property (Ahmed Hussein v. United States of America et al., case no. 94 Civ. 605, page 7, lines 20-22), the presiding judge for the United States District Court of the Southern District of New York stated:

“[H]e didn’t pay his taxes. There doesn’t seem to be any issue about that. Am I supposed to enjoin the IRS when he didn’t pay his taxes?”

In the background section of the Second Circuit Court of Appeals opinion in United States of America v. Ahmed Hussein (Docket No. 98-6180), the Court of Appeals stated:

“Following the district court’s [United States District Court of the Southern District of New York ] ruling, the parties entered into a consent judgment that ordered Hussein to pay $675,183.88 in outstanding liabilities for tax years 1983 and 1984, but preserved Hussein’s right to appeal the court’s ruling on the statute of limitations issue. This timely appeal followed.”

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK


AHMED HUSSEIN,		Docket No. 94-Civ-605 JFK

	Plaintiff,

- against -		AFFIDAVIT OF AHMED

		HUSSEIN IN SUPPORT

UNITED STATES OF AMERICA,		OF A MOTION FOR A

COMMISSIONER OF INTERNAL		TEMPORARY RESTRAINING

REVENUE and REVENUE OFFICER		ORDER AND A PRELIMINARY

PHILLIP GRANITE,		INJUNCTION

	Defendants.

STATE OF NEW YORK	)

	: ss

COUNTY OF NEW YORK	)

AHMED HUSSEIN, being duly sworn, deposes and says:

1. I am the plaintiff in the above-captioned action. I am employed as a stock broker with Dean, Witter, Reynolds, Inc. (“Dean Witter”) .

2. In 1983, while I was with another brokerage firm, my salary increased dramatically over what I earned in 1982 and my employer failed to withhold enough taxes, leaving me with a large tax bill due on April 15, 1984. Although I thought that I had enough money in my account to pay the taxes, I suffered a huge loss on a bond transaction in the beginning of 1984 that completely eliminated my net worth. Unfortunately, the tax law required me to report the money I had earned as ordinary income while the loss was treated as a capital loss that could not be offset against the ordinary income. As a result, I had a large tax liability for 1983 but no money with which to pay it.

3. I filed my tax return for 1983 showing an unpaid tax liability of approximately $400,000. This 1983 tax liability was assessed against me on May 28, 1984.

4. Over the following years, I paid more than $300,000 against the 1983 assessment and I worked closely with the Internal Revenue Service (“IRS”) to satisfy the remainder. In 1985, the revenue officer assigned to my case suggested that I make an offer in compromise to settle the assessment. The revenue officer, who was familiar with my finances, recommended an amount for the offer in compromise that he thought would be acceptable to the IRS.

5. On May 6, 1985, I submitted the offer. The form given to me by the revenue officer contained a provision waiving the running of the statute of limitations for the period that the offer in compromise was being considered by the IRS plus one year. Because I followed the directions of the revenue officer, I thought that the offer would be accepted quickly and that I was extending the statute of limitations for only a reasonable period of time. I never thought that I was subjecting myself to collection activity for the next ten years! I would not have signed the offer if I had known that this could happen.

6. Much to my surprise, the IRS sat on the offer for more than a year before they rejected it on September 4, 1986. The offer was under consideration from May 6, 1985 to September 4, 1986, or a period of one year, three months and twenty-nine days. Thus, the offer in compromise effectively extended the statute of limitations during this period plus one year.

7. On May 28, 1990, the normal six year statute of limitations for collection of the 1983 taxes expired. However, the offer in compromise effectively extended the statute by two years, three months and twenty-nine days, so that it expired on September 27, 1992.

8. Although the statute of limitations for collection of the 1983 taxes has expired, the Internal Revenue Service has continued to send me letters demanding payment of these taxes. I have always responded to each of these letters and I have advised the IRS that the statute of limitations has expired.

9. The IRS never responded to any of my communications until I received a letter dated January 10, 1994 from Revenue Officer Phillip Granite (Exhibit A attached hereto). The letter was encaptioned “FINAL NOTICE (NOTICE OF INTENTION TO LEVY).” The Notice Of Intention To Levy demanded payment of $707,122 for 1983 taxes and $20,026 for 1984 taxes. The notice indicated that, if I didn’t pay the taxes for 1983 and 1984 within ten days, the IRS would levy on my assets. My lawyers advise me that the letter was written on an out-dated IRS form and that the law has since changed to require a thirty-day notice before a levy can be issued.

10. On or about January 12, 1994, I spoke to Revenue Officer Granite by telephone and he told me that he was going to do whatever was necessary to collect the taxes from me. Mr. Granite later told my attorney that he intended to levy my salary if I did not provide him with a financial statement and a waiver of the statute of limitations immediately.

11. On or about January 14, 1994, I learned that my checking account at Chemical Bank, which contained over $20,000, was frozen because the IRS had issued a levy to the bank. A few days latter, I received a copy of the levy (Exhibit B attached hereto) and I noticed that it was dated January 11, 1994, only one day after the ten-day notice of intention to levy was dated. The bank has informed me that it intends to transfer all of the money in my checking account to the IRS on February 10, 1994.

12. On January 25, 1993, I was notified by Dean Witter that approximately $100,000 of cash and securities had been levied by the Internal Revenue Service. Nearly all of the money levied on was contained in my Individual Retirement Account. I immediately obtained a copy of the levy (Exhibit C attached hereto) and I noticed that it was dated January 18, 1994, only eight days after the ten-day notice of intention to levy was dated. Dean Witter is prepared to transfer all of the money in my Individual Retirement Account and my stock account to the Internal Revenue Service on February 8, 1994.

13. I will suffer irreparable harm if the Internal Revenue Service is permitted to continue with its illegal collection activity because I cannot afford to pay the Internal Revenue Service all of the money they say I owe. It appears that the Internal Revenue Service has no regard for the statute of limitations or for proper administrative procedures and that they are prepared to take everything that I own, including my retirement savings, and put me on the street. There is no way that I can continue to generate business as a stock broker if I am destitute. Indeed, because of the sensitive financial and fiduciary nature of my position at Dean Witter, I would probably be forced to leave the firm if Mr. Granite carries through on his threat to levy my salary. If I were forced to leave Dean Witter, I would loose almost all of my customers and my reputation within the industry would be tarnished beyond repair. My ability to earn a living and support my family (including my handicapped son) would be severely damaged.

14. In addition, my lawyers advise me that the levy against my Individual Retirement Account constitutes a withdraw from my account that will trigger income taxes and early withdraw penalties. Thus, if the Internal Revenue Service is permitted to take the balance of the account to pay 1983 and 1984 taxes without allocating any portion of the account to current taxes and penalties, the levy will simply create a new debt to the Internal Revenue Service.

15. I respectfully request that the Court stop the Internal Revenue Service from using its enormous powers to enforce the unlawful collection of the 1983 and 1984 taxes and from ruining my life.

/s/ Ahmed Hussein

AHMED HUSSEIN

Sworn to before me on this

1st day of February, 1994.

/s/ Rebecca Caravaglio

NOTARY PUBLIC

REBECCA CARAVAGLIO

Notary Public, State of New York

No. 43-4993626

Qualified in Richmond County

Commission Expires March 23, 1994

ORIGINAL

72741

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK


AHMED HUSSEIN,		9.4 Civ. 0605 (JFK)

	Plaintiff,	MEMORANDUM OPINION

- against -		AND ORDER

UNITED STATES OF AMERICA, COMMISSIONER OF INTERNAL REVENUE, and REVENUE OFFICER PHILLIP GRANITE,

	Defendants.

JOHN F. KEENAN, United States District Judge:

Before the Court is the motion of plaintiff, Ahmed Hussein, seeking a preliminary injunction to enjoin defendants from encumbering or collecting any of plaintiff’s property pending resolution of this suit. Hussein, a stock broker at Dean, Witter, Reynolds, Inc., owes $707,122.22 in taxes and interest arising from the tax year of 1983 and $20,026.00 in taxes and interest from the tax year of 1984. Defendants seek to collect these taxes by placing liens on Hussein’s bank accounts, as well as his accounts at Dean Witter, which he claims will ultimately result in his loss of employment. Defendants have already notified Dean Witter of their intent to levy upon Hussein’s salary.

Defendants argue that the Anti-Injunction Act, see 26 U.S.C. § 7421, prohibits persons from bringing suits “for the purpose of restraining the assessment or collection of any tax [to] be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.” 26 U.S.C. § 7421(a). This Act embodies Congress’s long-standing

policy against premature interference with the orderly administrative process by which taxes are determined, assessed and collected. Given that “taxes are the life-blood of government,” Bull v. United States, 295 U.S. 247, 259 (1935), it is necessary for the administrative collection process to proceed “without judicial intervention, and . . . legal right to disputed sums [is to] be determined in a suit for refund.” Enochs v. Williams Packing & Navigation Co., 370 U.S. 1, 7 (1962). Plaintiff may only receive an exception from the Act if he can show that (1) under no circumstances can the government prevail and (2) he has no other remedy at law. See id. at 7.

Hussein contends that the government cannot prevail because the statute of limitations on the portion of this action concerning the 1983 taxes has already run.¹ Prior to November 5, 1990, the statute of limitations on collection of any tax was six years after the assessment of the tax, unless the IRS and the taxpayer otherwise agreed in writing to extend the period. See 26 U.S.C. § 6502(a). On November 5, 1990, Congress extended the statute of limitations on the collection of taxes from six years to ten years. The Act applies a new ten-year period to taxes assessed after November 5, 1990 and to taxes assessed before that date, if the period for collection had not yet expired as of November 5, 1990. See Act of 1990, 1990 U.S.C.C.A.N. (104 Stat.) 1388-458, Pub. L. No. 101-508 § 11317.

¹	Plaintiff apparently concedes that defendants’ collection of his 1984 taxes are within the statute of limitations period. See Plaintiff’s Memorandum of Law at 2.

In the present case, Hussein’s 1983 taxes were assessed on May 28, 1984. On May 6, 1985, Hussein submitted an “Offer in Compromise,” which the IRS rejected on September 4, 1986. The effect of Hussein’s Offer in Compromise was to toll the running of the statute of limitation for the period during which the offer was pending (one year, three months and 29 days) and for one year thereafter. Thus, had Hussein not submitted an offer, the statute of limitations would have expired on May 28, 1990; instead, however, the offer tolled the six-year statute of limitations until September 27, 1992. Because Congress’s amendment to the limitations period occurred prior to September 27, 1992, the new ten-year period applies to Hussein’s case and the government is entitled to collect from plaintiff until September 27, 1996.

Hussein asserts that his Offer of Compromise was a collateral written agreement between him and the government to extend the limitations period to a date certain, without regard to 26 U.S.C § 6502(a). The Offer in Compromise states in relevant part:

The taxpayer-proponents agree to the waiver and suspension of any statutory periods of limitations for assessment and collection of the tax liability described in paragraph (1) while the offer is pending, during the time any amount offered remains unpaid and for one (1) year after the satisfaction of the terms of the offer.

IRS Offer to Compromise ¶ 8 (attached to Defendants’ Memorandum of Law). This waiver is not a contract to set a date certain for the expiration of the limitations period because waivers are not considered contracts. See Stanger v. United States, 282 U.S. 270, 276 (1931). In addition, even if contract principles were applied, plaintiff’s assertion would still fail because the language in the Offer of Compromise clearly suggests that the applicable statutory limitations period was merely tolled and not disregarded.

The Court finds no merit in plaintiff’s claim that he did not receive timely notice of the IRS’s intention to levy. Therefore, plaintiff’s application for a preliminary injunction is denied. Concerning defendants’ motion to dismiss, plaintiff is directed to submit his opposition to the motion by February 16, 1994. Defendants’ reply papers will be due on February 23, 1994.

SO ORDERED.


Dated:		New York, New York

		February 10, 1994

/s/ John F. Keenan

JOHN F. KEENAN

United States District Judge

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

August Term, 1998


(Argued: May 3, 1999		Decided: May 28, 1999)

Docket No. 98-6180

UNITED STATES OF AMERICA,

Plaintiff-Appellee,

—v.—

AHMED HUSSEIN,

Defendant-Appellant.

Before:

CABRANES and SACK, Circuit Judges,

and SHADUR,* District Judge.

*	The Honorable Milton I. Shadur of the United States District Court for the Northern District of Illinois, sitting by designation.

Appeal from a judgment of the United States District Court for the Southern District of New York (John F. Keenan, Judge) ordering the defendant to pay outstanding liabilities for tax years 1983 and 1984. On appeal, the defendant principally claims that the district court improperly invoked collateral estoppel, the law of the case doctrine, and principles of equity and fairness to preclude him from challenging the timeliness of the instant action as it pertains to his 1983 taxes. We agree, principally on the ground that the relevant finding by the district court in the earlier action was unnecessary to its ruling, and, accordingly, could not properly be given preclusive effect.

Judgment vacated in part (as to tax year 1983), affirmed in part (as to tax year 1984), and remanded.


		BRUCE LOCKE, Sacramento, CA (Bruce A. Burns, Burns Handler & Burns LLP, New York, NY, of counsel) for Appellant.

		GLENN C. COLTON, Assistant United States Attorney, Southern District of New York (Mary Jo White, United States Attorney, Gideon A. Schor, Assistant United States Attorney, of counsel) for Appellee.

JOSÉ A. CABRANES, Circuit Judge:

Ahmed Hussein appeals from a July 21, 1998 consent judgment entered by the United States District Court for the Southern District of New York (John F. Keenan, Judge) ordering him to pay the government $675,183.88 in outstanding

liabilities for tax years 1983 and 1984.¹ Hussein’s principal contention on appeal is that the district court improperly invoked collateral estoppel, the law of the case doctrine, and principles of equity and fairness to preclude him from challenging the timeliness of the instant action as it pertains to his liability for tax year 1983. On other grounds described in detail below, Hussein also contends that the instant action is untimely as it pertains to his 1984 taxes. For the reasons that follow, we vacate the judgment in part (as to Hussein’s 1983 taxes), affirm the judgment in part (as to Hussein’s 1984 taxes), and remand the cause for proceedings consistent with this opinion.

BACKGROUND²

The government filed the instant action on September 27, 1996. Hussein contends that the limitations period for collecting his 1983 taxes expired one day earlier, on September 26, 1996. In this appeal, the government does not challenge Hussein’s calculation of the limitations period. Instead, it contends—and the district court agreed—that the district court had ruled in prior litigation between the parties that the limitations period would run until September 27, 1996 and that Hussein is barred from relitigating the expiration date in the action before us now. Because of its significance to the issues presented in this appeal, we set forth the procedural history of the litigation between the parties in some detail.

Hussein’s 1983 taxes were assessed on May 28, 1984. On May 6, 1985, he submitted to the Internal Revenue Service (“I.R.S.”) an “Offer in Compromise” to settle his outstanding

¹	The consent judgment preserved Hussein’s right to bring this limited appeal.

For the sake of simplicity, this background section deals primarily with Hussein’s 1983 taxes. We set forth the facts necessary to understand Hussein’s claims regarding his 1984 taxes separately, infra. liabilities for those taxes. The I.R.S. received Hussein’s offer the following day and eventually rejected it on September 4, 1986. Hussein asserts—and the government does not dispute—that, pursuant to the terms set forth on the mandatory I.R.S. form embodying the Offer in Compromise, the limitations period for the collection of Hussein’s 1983 taxes was tolled for a period of two years, three months, and twenty-nine days, i.e., the pendency of Hussein’s offer, plus one year.

In January 1994, in an attempt to collect his still-unpaid 1983 taxes, the government levied Hussein’s checking and individual retirement accounts. Hussein responded by filing an action before Judge Keenan to enjoin the government’s collection efforts; soon thereafter, Hussein sought a preliminary injunction, on the ground that the statute of limitations had expired with respect to the collection of the 1983 taxes.³ The government, in turn, filed a motion to dismiss Hussein’s lawsuit in its entirety.

The district court denied Hussein’s request for a preliminary injunction in a Memorandum Opinion and Order dated February 10, 1994. The court first explained that, at the time the I.R.S. assessed Hussein’s 1983 taxes, a six-year limitations period applied to the government’s collection efforts. It then observed that a new law took effect on November 5, 1990 that (1) extended the relevant limitations period to ten years and (2) applied the new rule to any taxes for which the collection period had not expired as of the law’s effective date. See 26 U.S.C. § 6502(a); Omnibus Budget Reconciliation Act of 1990, Pub. L. No. 101-508 § 11317(c), 104 Stat. 1388 (1990). Turning to the specifics of Hussein’s case, the court noted that, absent any tolling, the limitations period for the collection of his 1983 taxes would have expired on May 28, 1990. However, the court determined that the tolling caused by Hussein’s filing of the Offer in Compromise extended the expiration of the limitations period beyond November 5, 1990, thereby triggering the new, ten-year rule.

³	Hussein conceded in the 1994 action that the limitations period governing the collection of his 1984 taxes had not yet expired.

Applying the ten-year rule to Hussein’s 1983 taxes, the court concluded that “the government is entitled to collect from [Hussein] until September 27, 1996,” a date that included the tolling period caused by Hussein’s Offer in Compromise. The court derived that specific expiration date from an affidavit that Hussein had submitted in support of his motion for a preliminary injunction. In the affidavit, Hussein had stated that “the offer in compromise effectively extended the statute [of limitations] by two years, three months and twenty-nine days, so that it expired on September 27, 1992.” Hussein’s affidavit assumed that a six-year limitations period applied. Accordingly, to arrive at an expiration date based on a ten-year limitations period, the court simply added four years to the date calculated by Hussein.

After setting forth its conclusion as to the expiration date for the limitations period governing the collection of Hussein’s 1983 taxes, the district court explained that it was Hussein’s contention that his Offer in Compromise was an agreement to “extend the limitations period to a date certain,” without regard for any limitations period imposed by law. In other words, as it was characterized by the district court, Hussein’s argument was that he and the I.R.S. had contracted for a fixed expiration date of September 27, 1992, and that, accordingly, the new ten-year limitations rule was inapplicable. The court rejected this argument, however, finding that Hussein and the I.R.S. had no such agreement. Having disposed of Hussein’s only argument, the court concluded that the government’s levies were timely and, accordingly, denied Hussein’s motion for a preliminary injunction. Before the court ruled on the government’s cross-motion to dismiss, the parties agreed to a stipulated dismissal of Hussein’s lawsuit, without prejudice, and returned to the administrative process.

On September 27, 1996, the government filed the instant action, pursuant to 26 U.S.C. § 7403,⁴ to reduce to judgment assessments of Hussein’s liabilities for tax years 1983 and 1984. In response, Hussein filed a motion to dismiss arguing, inter alia, that the action was untimely. Specifically, Hussein maintained that the limitations period for collecting the 1983 taxes expired on September 26, 1996, one day before the instant action was filed. The district court denied Hussein’s motion, holding that it had determined in the 1994 litigation that the expiration date of the limitations period for collecting the 1983 taxes was September 27, 1996 and that, accordingly, collateral estoppel, the law of the case doctrine, and principles of equity and fairness precluded Hussein from challenging the timeliness of the instant action on the basis of a different expiration date.

Following the district court’s ruling, the parties entered into a consent judgment that ordered Hussein to pay $675,183.88 in outstanding liabilities for tax years 1983 and 1984, but preserved Hussein’s right to appeal the court’s ruling on the statute of limitations issue. This timely appeal followed.

⁴

This statute provides, in pertinent part, that “[i]n any case where there has been a refusal or neglect to pay any tax … the Attorney General or his delegate … may direct a civil action to be filed in a district court of the United States to enforce the lien of the United States … with respect to such tax or liability.”

ANALYSIS

A.	Tax Year 1983

On appeal, Hussein reasserts his argument that the government’s action was untimely as to the collection of his 1983 taxes and contends that the district court improperly precluded him from litigating that issue below. The government does not challenge Hussein’s calculation of the limitations period as having expired on September 26, 1996. Instead, it adopts the district court’s conclusions that (1) the identical limitations issue was litigated in the 1994 action, (2) the court found in that action that the limitations period would expire on September 27, 1996, the day the instant lawsuit was filed, and (3) collateral estoppel, the law of the case doctrine, and principles of equity and fairness bar Hussein from relitigating the expiration date. Moreover, in addition to adopting the district court’s reasoning, the government argues that we should affirm on the basis of judicial estoppel, a ground not relied on by the district court. For the reasons that follow, we conclude that none of the grounds asserted by the government bars Hussein from challenging the timeliness of the instant action as it pertains to his 1983 taxes.

Collateral estoppel, or issue preclusion, applies when “(1) the issues in both proceedings are identical, (2) the issue in the prior proceeding was actually litigated and actually decided, (3) there was full and fair opportunity to litigate in the prior proceeding, and (4) the issue previously litigated was necessary to support a valid and final judgment on the merits.” In re PCH Assocs., 949 F.2d 585, 593 (2d Cir. 1991).

Collateral estoppel is inapplicable here for the fundamental reason that the district court’s earlier finding that the limitations period would expire on September 27, 1996 was not necessary to the denial of Hussein’s motion for a preliminary injunction in the 1994 action; in other words, the court’s finding was dictum.⁵ As it was presented to the district court, the merits of Hussein’s request for a preliminary injunction in the 1994 action turned simply on Hussein’s argument that the Offer in Compromise called for the limitations period to expire on a date certain, September 27, 1992, without regard for the new, ten-year rule. There was no dispute that the tolling caused by the Offer in Compromise meant that the imitations period had not expired as of November 5, 1990, the effective date of the law that mandated the ten-year rule. Nor was there any dispute that, if a ten-year limitations period applied, then the government’s January 1994 levies were timely. Accordingly, once the district court rejected Hussein’s contention that the ten-year rule was inapplicable, it was unnecessary for the court to conclusively determine the exact date on which the limitations period would expire.

The rationale for the principle that preclusive effect will be given only to those findings that are necessary to a prior judgment is that “a collateral issue, although it may be the subject of a finding, is less likely to receive close judicial attention and the parties may well have only limited incentive to litigate the issue fully since it is not determinative.” Commercial Assocs. v. Tilcon Gammino, Inc., 998 F.2d 1092,

⁵	Our conclusion that the court’s finding was not necessary to its denial of the preliminary injunction might also be thought to implicate certain of the other criteria for the application of collateral estoppel, particularly the questions of whether the issue in both proceedings is identical

and whether Hussein had a fair opportunity to litigate the issue. However, in light of our conclusion that the “necessarily decided” element of collateral estoppel has not been met, we need not specifically address the other elements. Nor is there any need for us to determine whether the district court’s 1994 ruling had the requisite finality to permit the application of collateral estoppel. See generally Metromedia Co. v. Fugazy, 983 F.2d 350, 366 (2d Cir. 1992) (noting that “the concept of finality for collateral estoppel purposes includes many dispositions which, though not final [for the purposes of appeal pursuant to 28 U.S.C. § 1291], have nevertheless been fully litigated”) (internal quotation marks omitted).

1097 (1st Cir. 1993) (emphasis suppressed). It is clear that this rationale is applicable to the case before us. Because of the particular argument asserted by Hussein in the 1994 litigation, there was no need for the court or the parties to focus on the precise expiration date of the limitations period. Presumably, once the district court rejected Hussein’s contract-based argument, no one involved in the proceedings gave any attention to whether the limitations period ran until September 26, as opposed to September 27, 1996. Under these circumstances, collateral estoppel does not preclude Hussein from challenging the timeliness of the instant action.

The government’s remaining contentions require little discussion. As noted above, the government asserts that the law of the case doctrine also precludes Hussein’s challenge to the timeliness of the government’s action. Under the particular formulation relevant to this appeal, the law of the case doctrine holds that “a legal decision made at one stage of litigation, unchallenged in a subsequent appeal when the opportunity to do so existed, becomes the law of the case for future stages of the same litigation, and the parties are deemed to have waived the right to challenge that decision at a later time.” North River Ins. Co. v. Philadelphia Reinsurance Corp., 63 F.3d 160, 164 (2d Cir. 1995) (internal quotation marks omitted) (emphasis added).⁶ The government contends that Hussein waived his opportunity for appellate review of the district court’s finding on the limitations issue by agreeing to a stipulated dismissal of the 1994 action and urges that Hussein is therefore bound by the court’s finding that the limitations period expired on September 27, 1996.

⁶	The government correctly notes that we have previously held that, “[w]hile the doctrine is ordinarily applied in later stages of the same lawsuit, it also has application to different lawsuits between the same parties.” PCH Assocs., 949 F.2d at 592.

Regardless of his agreement to a stipulated dismissal of the 1994 action, however, Hussein did not have a reasonable opportunity to obtain appellate review of the district court’s finding regarding the expiration of the limitations period. For the reasons that we have already set forth, that finding was mere dictum and, as such, could not have been appealed by Hussein. Accordingly, the law of the case doctrine has no application here.

We are similarly unpersuaded by the government’s invocation of the doctrine of judicial estoppel. A party invoking that doctrine “must show that (l) the party against whom judicial estoppel is being asserted advanced an inconsistent factual position in a prior proceeding, and (2) the prior inconsistent position was adopted by the first court in some manner.” AKA Marine & Aviation Ins. (U.K.) Ltd. v. Seajet Indus. Inc., 84 F.3d 622,628 (2d Cir. 1996). The purposes of the doctrine are to “preserve the sanctity of the oath” and to “protect judicial integrity by avoiding the risk of inconsistent results in two proceedings.” Simon v. Safelite Glass Corp., 128 F.3d 68, 71 (2d Cir. 1997) (internal quotation marks omitted). The government notes that the district court derived its finding as to the expiration of the limitations period from Hussein’s own affidavit, which had stated that the six-year imitations period had expired on September 27, 1992. On that basis, the government contends that Hussein may not now claim that the ten-year limitations period expired on September 26, 1996.

Even assuming, for the argument, that Hussein’s initial calculation of the expiration of the limitations period was a factual position, judicial estoppel is inapplicable under the circumstances presented here. We have previously observed that judicial estoppel does not apply “when the first statement was the result of a good faith mistake or an unintentional error.” Id. at 73 (citations omitted). In our view, this exception to the general rule clearly governs the case before us. The miscalculation in Hussein’s affidavit was undoubtedly the result of an unintentional error. Hussein had absolutely no incentive in the 1994 proceeding to persuade the court that the limitations period expired on September 27, as opposed to September 26, 1996. Accordingly, we will not invoke the doctrine of judicial estoppel to preclude Hussein from challenging the timeliness of the instant action.

Finally, we turn to the government’s contention that principles of equity and fairness also preclude Hussein from challenging the timeliness of the instant action. Specifically, the government points out that Hussein has long been on notice of his tax liabilities and of the district court’s finding that the limitations period expired on September 27, 1996, that the parties’ consent judgment has eliminated any uncertainty as to the amount of taxes that Hussein owes, and that the government itself relied on the district court’s finding.

The government has not brought to our attention any precedent in which, under circumstances remotely analogous to those presented here, a court has set aside a limitations period on the basis of principles of equity and fairness, and we are unwilling to set such a precedent here. Moreover, even if we were inclined to consider such principles as a basis for setting aside the limitations period, the government’s case is hardly compelling. The government obviously had the means to perform its own calculation of the limitations period, and we question the wisdom of its asserted reliance on the district court’s finding — one that was based on the taxpayer’s calculation and made by the court in dictum.

B.	Tax Year 1984

As noted at the outset, Hussein also challenges the timeliness of this action as it pertains to the collection of his 1984 taxes. Conceding, as he must, that a ten-year limitations period applies to the collection of those taxes, Hussein maintains that the limitations period expired on June 24, 1995, ten years after the taxes were assessed. The district court rejected Hussein’s contention, concluding that his May 6, 1985 Offer in Compromise tolled the limitations period for the collection of his 1984 taxes and that the government’s lawsuit was therefore timely as to those taxes. Although the district court did not specify an expiration date for the applicable limitations period, Hussein conceded at oral argument before this Court that if the district court’s holding regarding tolling was correct, then this action was timely as to the 1984 taxes.

Hussein argues at the threshold that no tolling was possible because his Offer in Compromise did not include his 1984 taxes. But Hussein concedes that he did not present this argument to the district court. Nor does he dispute the government’s contention that he in fact argued to the district court the contrary position—that is, that his offer did include the 1984 taxes. Under these circumstances, Hussein is precluded from arguing on appeal that the offer did not include the 1984 taxes.

In any event, Hussein maintains that any tolling caused by his Offer in Compromise applied only to the six-year limitations period in effect at the time the offer was submitted, not to the ten-year limitations period that took effect in November 1990. On this theory, Hussein contends that the limitations period for the collection of his 1984 taxes expired on June 24, 1995, well before the instant action was filed. As support for his argument, Hussein asserts only that 26 U.S.C. § 6502(a), which sets forth the applicable limitations period, does not specifically provide for “the tacking on of a suspension period agreed to under the former six-year statutory period, to further extend the new ten-year period.”

We are unpersuaded by Hussein’s contention that the ten-year limitations period now governing the collection of his 1984 taxes was not tolled by his submission of an Offer in Compromise. The I.R.S. form that Hussein submitted in connection with that offer unequivocally provided

that Hussein agreed to the “suspension of any statutory periods of limitations for assessment and collection of the tax liability” that was the subject of the offer. Thus, Hussein’s agreement with the I.R.S. placed no restriction on the limitations period to which the tolling would apply. And Hussein has not identified any statutory provision that would preclude us from giving effect to the explicit terms of that agreement.

Accordingly, in light of Hussein’s concession that our resolution of the tolling issue is dispositive, we conclude that the instant action is timely as to the collection of Hussein’s 1984 taxes.

CONCLUSION

Based on the foregoing analysis, we vacate the judgment in part (as to tax year 1983), affirm it in part (as to tax year 1984), and remand the cause for proceedings consistent with this opinion.

No costs.

Mr. Hussein’s Prior Proxy Solicitations

Hussein’s 2005 Attempt

In connection with our 2005 Annual Meeting, Mr. Hussein launched a proxy contest for three director seats in opposition to the full slate nominated by the Board. Only two of Mr. Hussein’s candidates were elected based upon the determination of IVS Associates, the independent inspector of elections for the meeting. Although Mr. Hussein disputed the election results, IVS Associates overruled his objections. In response, Mr. Hussein commenced a lawsuit in the California Superior Court against the Company and every one of its directors (other than the one he had selected to sit on the Board). In his Complaint in the lawsuit (filed on October 17, 2005), Mr. Hussein made an attack on the other Board members’ independence and asked the court to (1) find that the 2005 election of directors at the Meeting was invalid and (2) order that the votes be re-tabulated without certain disputed Shares being counted. The court ruled against Mr. Hussein, finding he was “not entitled, as an equitable or legal matter, to the relief sought because [he] showed no violation of New York Stock Exchange Rules, Section 709, or any other applicable statute, rule, or common law doctrine in connection with the 2005 election for the Board of Directors.” The court ordered that formal judgment be awarded against Mr. Hussein and in favor of the Company and all of the directors sued by Mr. Hussein.

Download the Challenges Document Here

LOGO

IVS Associates, Inc. is the duly appointed inspector of election for the Quality Systems, Inc. Annual Meeting held September 21, 2005. We are submitting this response to challenges made to our Preliminary Voting Report at a review session held September 30, 2005. The session was held at the Hotel DuPont in Wilmington, Delaware and was attended by IVS and representatives of Quality Systems management and representatives of Mr. Hussein who solicited proxies in opposition to management.

1) Challenge made on behalf of the Hussein proxy committee- (paraphrased)

The votes submitted by ADP to management on the form dated September 20, 2005 contained “uninstructed votes” which were improperly tabulated by the Inspectors in favor of management’s nominees. It is clear that New York Stock Exchange rule 452 forbids such voting in contested situations (as was this meeting). We have filed two letters and an 85-page document with IVS, which fully document the facts of the uninstructed shares, the effect of, and the rules that restrict such voting.

Further, ADP sent a note to the beneficial holders informing them they would have to instruct their vote in order for it to be counted. However ADP still submitted some 800,000 shares with out receiving instructions from the beneficial holders.

The inspectors duties under California law (as cited in the letter to IVS) include determining the “right to vote” and since the uninstructed shares had no such rights, IVS should deduct the uninstructed shares from the vote totals. By counting these disputed shares, Mr. Hussein will get only two seats on the board of directors rather than the three he would otherwise win.

Response: Our ruling is not based on the veracity of the facts as presented in the letters and attachments previously submitted. Rather if we were to take them in to account we would violate the duties of inspector of election. In determining the “right to vote” we are limited to the books and records of the corporation, the record date list and omnibus proxies and the proxies themselves, We are not permitted to consider any further evidence or information in determining the right to vote except for the limited purpose of resolving bank/broker over-vote situations. The challenge is over ruled.

2) Challenge made on behalf of the Company’s proxy committee to the opposition proxy card for the account of” IDX Inc, Attn. Jack Kane.” The signatory had no authority to sign the proxy.

Response: Jack Kane is listed on the registration and has authority to sign the proxy which he did. The challenge is over ruled.

3) Challenge made on behalf of the Company’s proxy committee to the opposition proxy card for the account of “Claude H. Maxwell & William C. Maxwell Jt Ten.” The signatory had no authority to sign the proxy.

Response: The card is signed by William Maxwell in his individual capacity and as power of attorney for Claude. Either or both signatures are valid for this account. The challenge is over ruled.


October 3, 2005		IVS ASSOCIATES INC. Independent Voting Services 111 CONTINENTAL DRIVE SUITE 210 NEWARK DELAWARE 19713 T 302 369 3779 F 302 369-8486
IVS Associates, Inc.

William A. Marsh

James J. Raitt

Hussein’s 2008 Attempt

In connection with the 2008 Annual Meeting, Mr. Hussein again announced his intention to nominate competing slate of candidates to the Board, this time proposing six candidates out of a total of nine Board positions. Mr. Hussein also proposed an amendment to the Company’s Bylaws that would have amended the definition of “independence” for purposes of service on the Board, a proposal which the majority of the Board believed was intended to cause Mr. Razin to be ineligible to serve as Board chairman.

All of the Company’s nominees were endorsed by each of RiskMetrics, Glass Lewis and Proxy Governance, the country’s three leading proxy advisor services, who recommended that shareholders fully support the Quality Systems nominees. With the exception of two of Mr. Hussein’s nominees, including himself, none of Mr. Hussein’s nominees received more than 0.05% of the cumulative votes cast. At the time, Mr. Hussein beneficially held approximately 16.8% of the Company’s shares, which we believe enabled him, through cumulative voting, to secure two director seats.

The Company incurred approximately $1.5 million in expenses to defend the Company’s slate at the 2008 Annual Meeting. In the second quarter of fiscal 2012, these expenses resulted in a reduction to earnings per share of approximately $0.03.

Why You Should Vote FOR Our Director Nominees: Craig Barbarosh, George Bristol, Mark Davis, Russell Pflueger, Steven Plochocki, Sheldon Razin, Lance Rosenzweig and Maureen Spivack

QSI Governance

Our Board is committed to strong governance practices and Quality Systems’ corporate governance practices are strongly pro-shareholder. For example, our governance structure includes an annually-elected Board, cumulative voting rights and rights of shareholders to call meetings and act by written consent, and the Company has no “poison pill” rights plan. Our corporate governance provisions meet or exceed NASDAQ requirements, and all of our nominees, except for Mr. Plochocki (who is a current member of our management team,) are independent under these criteria.

A short list of the accolades that Quality Systems has received from leading independent shareholder advisory services and other third parties in recognition of its strong governance record follows:

•

In 2011, ISS rated QSI in its most favorable category (“green- low concern”) for board structure, shareholder rights, and audit.

•

In 2011, Glass Lewis gave QSI an “A” grade in its pay-for-performance assessment.

Our highly qualified Board nominees are drawn from the financial services, M&A, legal, healthcare, international outsourcing and information technology fields. With over 200 years of collective industry experience, they provide the breadth and depth of relevant knowledge and experience necessary to lead our Company.

Collectively, they provide the right diversity of experience, as well as a critical understanding of our Company and our industry. Our current Board is active, engaged and works effectively and collaboratively with our management team to execute the right strategic plans for our Company to benefit all shareholders.


Director & Occupation	Expertise	Years of Relevant Experience		Years on the QSI Board
Sheldon Razin Founder and Chairman, Quality Systems, Inc.	Healthcare IT		38		38
Steven Plochocki President & CEO, Quality Systems, Inc.	Healthcare		36		8
Russell Pflueger Founder, Chairman & CEO, Quiescence Medical, Inc.	Healthcare		25		6
George Bristol Managing Director – Corporate Finance, Janas Associates	Financial Services		26		4
Craig Barbarosh Partner, Katten Muchin Rosenman LLP	Banking & Corporate Law		20		3
Maureen Spivack Managing Director, Locust Walk Securities	Financial Services - Healthcare		20		2
Lance Rosenzweig CEO, 24/7 Card	International Outsourcing		14		—
Mark Davis Managing Director, B. Riley & Co, LLC	Financial Services – IT		20		—

For additional information about our nominees, please see each of their full biographies here.

Quality Systems, Inc.’s 2012 Board of Directors Nominees

Sheldon Razin, age 74, is a director. He is the founder of our company and has served as our Chairman of the Board since our incorporation in 1974. Throughout his tenure as our Chairman, Mr. Razin has received several awards recognizing his service and contributions as a director. Most recently, Mr. Razin was honored in 2011 as a Director of the Year in Orange County’s 16th Annual Forum for Corporate Directors Awards. Mr. Razin’s past honors include: winner in the Software Category of TechAmerica’s 52nd Annual Innovator Awards in 2010, the Chairman of the Year in the 2009 American Business Awards, the 2009 Ernst & Young Entrepreneur of the Year in the Healthcare Category for Orange County and the Excellence in Entrepreneurship Award from the Orange County Business Journal in 2009. Mr. Razin also served as our Chief Executive Officer from 1974 until April 2000. Since our incorporation until April 2000, he also served as our President, except for the period from August 1990 to August 1991. Additionally, Mr. Razin served as our Treasurer from our incorporation until October 1982. Prior to founding our company, he held various technical and managerial positions with Rockwell International Corporation and was a founder of our predecessor, Quality Systems, a sole proprietorship engaged in the development of software for commercial and space applications and in management consulting work. Mr. Razin holds a B.S. degree in Mathematics from the Massachusetts Institute of Technology. Mr. Razin, as our founder, brings valuable knowledge to our Board regarding our history, operations, technology and marketplace.

Steven T. Plochocki, age 60, is a director and has been our Chief Executive Office since August 16, 2008 and our President since January 25, 2012. From February 2007 to May 2008, he served as Chairman and Chief Executive Officer of Omniflight Helicopter, Inc., a Dallas-based air medical services company. From October 2006 to February 2007, Mr. Plochocki was a private healthcare investor. He previously served as Chief Executive Officer and Director of Trinity Hospice, a national hospice provider from October 2004 through October 2006. Prior to joining Trinity Hospice, he was Chief Executive Officer of InSight, a national provider of diagnostic imaging services from November 1999 to August 2004. He was Chief Executive Officer of Centratex Support Services, Inc., a support services company for the healthcare industry and had previously held other senior level positions with healthcare industry firms. He holds a B.A. in Journalism and Public Relations from Wayne State University and a Master’s degree in

Business Management from Central Michigan University. Mr. Plochocki has been a director of our company since 2004. Mr. Plochocki’s position as our Chief Executive Officer, as well as his prior executive experience with other companies, provides our Board with the perspective of a person with significant executive management experience.

D. Russell Pflueger, age 48, is a director. Mr. Pflueger is an investor and serial entrepreneur with over 25 years in healthcare and over 30 issued patents. His background includes R&D and sales positions at organizations including the National Institutes of Health, Pfizer, Baxter Healthcare, and Beech Street. He also helped form, manage, and sell a major medical practice and surgery centers. He was a semi-finalist for the Ernst & Young Orange County Entrepreneur of the Year award in 1999. In 2002, Russell sold Pain Concepts, Inc., a minimally invasive spinal device company he founded to Stryker, Inc. (SYK:NYSE) for a publicly reported $42.5 million. He is the founder of Quiescence Medical, Inc., a medical device development company working on novel approaches to the treatment of sleep apnea, and has served as its Chairman and Chief Executive Officer since its inception in 2002. Mr. Pflueger is an active investor in many public and private companies and also various real estate interests. He played collegiate basketball and golf, holds a Chemical Engineering degree from Texas A&M University, and a Master of Business Administration degree with top honors from the University of California at Irvine. Mr. Pflueger has been a director of our company since 2006. Mr. Pflueger brings to our Board experience in the healthcare industry as an entrepreneur and corporate and government employee, as well as his diverse work-related experiences in research and development, sales and executive management.

George H. Bristol, age 63, is a director. Mr. Bristol is a Managing Director of Janas Associates, a corporate financial advisor. From August 2006 until March 2010 he served as Managing Director — Corporate Finance of Crowell Weedon & Co. Prior to August 2006, he was a member and Chief Financial Officer of Vantis Capital Management, LLC, a registered investment advisor which managed the Vantis hedge funds totaling over $1.4 billion from November 2002. Prior to Vantis, he was an investment banker with several firms including Ernst & Young, Paine Webber, Prudential Securities and Dean Witter. He is a graduate of the University of Michigan and Harvard Business School. Mr. Bristol has been a director of our company since 2008. Mr. Bristol’s experience at Janas, Vantis and his various corporate finance positions provides our Board with insight from someone with direct responsibility for strategic and transactional financial matters.

Craig A. Barbarosh, age 44, is a director. Mr. Barbarosh is a partner at the international law firm of Katten Muchin Rosenman LLP and was previously a partner of the international law firm of Pillsbury Winthrop Shaw Pittman LLP. Mr. Barbarosh is a nationally recognized restructuring expert. He has served in several leadership positions while a partner at Pillsbury including serving on the firm’s Board of Directors, as the Chair of the firm’s Board’s Strategy Committee, as a co-leader of the firm’s national Insolvency & Restructuring practice section and as the Managing Partner of the firm’s Orange County office. At Katten, Mr. Barbarosh is a member of the firm’s Board and management team. Mr. Barbarosh received a Juris Doctorate from the University of the Pacific, McGeorge School of Law in 1992, with distinction, and a Bachelor of Arts in Business Economics from the University of California at Santa Barbara in 1989. Mr. Barbarosh received certificates from Harvard Business School for completing executive education courses on Private Equity and Venture Capital (2007) and Financial Analysis for Business Evaluation (2010). Mr. Barbarosh is also a frequent speaker and author on restructuring and governance topics. Mr. Barbarosh has been a director of our company since September 2009. Mr. Barbarosh, as a practicing attorney specializing in the area of financial and operational restructuring and related mergers and acquisitions, provides our Board with experienced guidance on similar transactions facing our company. Mr. Barbarosh is also a director of Sabra Health Care REIT, Inc. (NASDAQ: SBRA), where he is the Chair of the Audit Committee and a member of the Compensation Committee.

Maureen A. Spivack, age 55, is a director. Ms. Spivack has over 20 years of investment banking experience in executing strategic and financial transactions for health care companies. Ms. Spivack is a Managing Director at the Healthcare Advisory Firm, Locust Walk Securities. She joined Locust Walk after 3.5 years as a Managing Director in the health care group of Morgan Keegan & Co. Prior to joining Morgan Keegan in 2008, Ms. Spivack served as a Managing Director in the Global Healthcare Group of UBS Investment Bank from 2006 until June 2008. From 1998 to 2006, Ms. Spivack was a Managing Director and head of Strategic Advisory Services for Health Care at Merrill Lynch & Co. Prior to joining Merrill Lynch Health Care Group, Ms. Spivack was a Partner at Ernst & Young, where she managed the National Healthcare Corporate Finance practice for 10 years. Ms. Spivack has an MBA from The Wharton School and an MSN from the University of Pennsylvania. Ms. Spivack’s 20 years of experience executing strategic and financial transactions for publicly traded, privately held and not-for-profit healthcare companies, including hospitals and physician groups, provides significant insights and experience to our Board in these areas.

Lance E. Rosenzweig, age 49, is a director. Mr. Rosenzweig is founder and chief executive officer of 24/7 Card, a provider of pre-paid debit and remit cards. Prior to founding 24/7 Card in 2010, Mr. Rosenzweig founded and served as chairman of the board of PeopleSupport, Inc., a business process outsourcing company with operations in the Philippines and Costa Rica, since its inception in 1998. He also served as PeopleSupport’s chief executive officer from March 2002 until the company’s sale in 2008. From 1993 to 1997, Mr. Rosenzweig was a founder, chairman of the board and president of Newcastle Group, a privately held plastics manufacturing company. He was also a founder of Unisite, a privately held wireless cell site management company. Prior to 1993, Mr. Rosenzweig was a divisional vice president at GE Capital; a vice president in the investment banking group of Dean Witter

(now Morgan Stanley); a vice president in the investment banking group of Capel Court Pacific, an Australian investment banking firm; and a corporate planning manager of Jefferson Smurfit Group, a multinational packaging company. Mr. Rosenzweig has a Master’s degree in business administration from Northwestern University’s Kellogg School of Management and a Bachelor of Science degree in industrial engineering, with Tau Beta Pi honors, from Northwestern University.

Mark H. Davis, 51, is a Managing Director at B. Riley & Co, LLC, an investment firm specializing in research, sales and trading and corporate finance. From October 2010 to February 2012, Mr. Davis was Head of Technology Investment Banking at Cantor Fitzgerald. From March 2009 to February 2010, Mr. Davis was a Managing Director at Macquarie Capital, an Australian Merchant and Investment Banking firm. From 2004 to 2009, Mr. Davis was a Managing Director at Citigroup, a diversified financial institution, focused on providing strategic and financial advice to a broad range of information technology companies and was head of its Data Infrastructure sector. Earlier in his career, Mr. Davis also held Director and Vice President positions at Citigroup, and served as a certified public accountant for Price Waterhouse where he was an Audit Senior. Mr. Davis earned a Master’s of Business Administration from the Wharton School of the University Of Pennsylvania, where he graduated with distinction and graduated Summa Cum Laude from the University of Maryland with a Bachelor of Science in Accounting. Mr. Davis’s more than 20 years’ experience advising and financing technology - related companies including software, cloud infrastructure and information technology firms provides the Board with insights into the rapid changes in technology including software as a service, implications of the cloud and other areas important to the Company’s strategy. In addition, his background in Public Accounting provides the Board with insights into financial reporting and internal controls.

QSI Performance

Our Board nominees and management team offer Quality Systems shareholders what we believe is a winning strategy to capture significant opportunities for continued revenue and earnings growth in this rapidly changing marketplace.

In the past five years, our Company has developed a strategic plan which we believe is designed to broaden its product offering and customer reach, has completed several successful acquisitions (without incurring debt) and has expanded into new markets, all while providing solid shareholder returns. We are focusing on maximizing value for all shareholders through prudent growth and strengthening our product and service offerings to capitalize on current and future opportunities, while capturing additional market share and returning capital to our shareholders through dividends.

We believe our incumbent Board nominees and our management team have proven they have the vision and skills to grow our business and position it for continued success.

Consider the following facts about the Company and its performance:

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Strong Track Record of Organic Growth and Profitability

For the fiscal year ended March 31, 2012, revenue increased by 22% and fully-diluted earnings per share increased by 21%. Over the past five fiscal years, revenue and earnings per share have grown at a compound annual growth rate of 23% and 18%, respectively. We believe that Quality Systems is among the most profitable companies in its market segment with profit margins exceeding 17% in each of the last two fiscal years.

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Excellent Cash Flow Generation

Quality Systems continues to generate extremely strong cash flow from its operations, allowing it to invest for future growth and return money to shareholders. The Company generated approximately $77 million in cash flow from operations in the year ended March 31, 2012, representing a five-year compounded average growth rate of 22%, which we believe is among the strongest of our peers.

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Regular Quarterly Dividend Payments

As a result of our strong financial performance, we have been able to return a steady dividend to shareholders. Over the five years ended March 31, 2012, we have returned a total of $3.00 per share to investors in dividends. In fiscal 2012, the Company increased the quarterly dividend from $0.15 per share to $0.175 per share and returned a total of $41 million in cash to shareholders.

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Demonstrated Strategic Focus on Acquisitions that Increase Shareholder Value

In just four years, we have completed and integrated nine self-funded acquisitions to capitalize upon key opportunities within the changing healthcare IT sector. These acquisitions have strengthened our existing business lines and expanded our addressable markets. At the same time, we have been disciplined in our pursuit of acquired businesses and have rejected acquisitions, both large and small, because they were strategically or culturally incompatible or were not financially accretive.

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Broad Bench of Management Talent Developing New Business Lines

Over the last several years, we have established four business divisions, led by experienced managers, to provide focused leadership to develop the business plans, technology and infrastructure required to successfully introduce new complimentary software and service offerings. At the same time, we have worked to tightly integrate many of these new solutions with our existing software to further strengthen our ability to cross-sell within our existing customer base for each of our product lines and win multi-solution deals with new customers.

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Award Winning Track Record of Success. Consider these facts:

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In May 2012, Forbes ranked QSI as one of the 25 Fastest Growing Technology Companies for the FOURTH consecutive year;

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In November 2011, Forbes ranked QSI as one of the 100 Best Small Companies for the ELEVENTH consecutive year — #14 in 2011; and,

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In October 2011, we received the International Business Award for Company of the Year in the field of Computer Services.

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The following table highlights the Company’s growth over the past several years.


Fiscal year ended March 31,	2012		2011		2010		2009		2008
Revenue	$	429,835	$	353,363	$	291,811	$	245,515	$	186,500
Net income	$	75,657	$	61,606	$	48,379	$	46,119	$	40,078
Diluted earnings per share	$	1.28	$	1.06	$	0.84	$	0.81	$	0.72
Cash dividends declared per share	$	0.70	$	0.63	$	0.60	$	0.58	$	0.50
Total shareholders’ equity	$	295,177	$	224,670	$	188,289	$	155,567	$	113,705
Cash flow from operations	$	76,786	$	70,064	$	55,220	$	48,712	$	43,599

Company Accolades

Quality Systems’ track record of strategic growth, profitability and innovation in the industry are also well documented. Considering the following third party recognitions that Quality Systems and its leadership team have received for their outstanding performance from December 2008 to June 2012:

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June 18, 2012: Quality Systems Wins 14 Stevie Awards in 10th Annual American Business Awards, including awards for:

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Steven T. Plochocki, CEO: Executive of the Year - Health Products & Services

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Management Team of the Year

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Company of the Year - Health Products & Services

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Fastest Growing Tech Company of the Year - Up to 2,500 Employees

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Most Innovative Tech Company of the Year - Up to 2,500 Employees

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June 22, 2012: Quality Systems Chief Financial Officer Paul A. Holt Named Best Finance Executive in TechAmerica’s 19th Annual High-Tech Innovation Awards

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June 4, 2012: Quality Systems Included in Forbes’ Annual List of America’s 25 Fastest-Growing Tech Companies

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February 3, 2012: Quality Systems Chief Financial Officer Paul A. Holt Named 2012 CFO of the Year by Orange County Business Journal

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November 7, 2011: Quality Systems Ranks 14th on Forbes’ Annual List of America’s 100 Best Small Companies

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October 13, 2011: Quality Systems Recognized as a Winner in four categories of the International Business Awards, including Company of the Year and IT Executive of the Year

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June 27, 2011: Quality Systems Wins Three Stevie Awards in 9th Annual American Business Awards

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June 10, 2011: Quality Systems Chief Executive Officer Steven T. Plochocki Named Outstanding Technology CEO in TechAmerica’s 18th Annual High-Tech Innovation Awards

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March 14, 2011: Quality Systems Included in Forbes’ Annual List of America’s 25 Fastest-Growing Tech Companies Ranks 23^rd

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March 10, 2011: Quality Systems Chairman of the Board Sheldon Razin Honored as Director of the Year in 16th Annual Forum for Corporate Directors Awards

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November 18, 2010: Quality Systems Ranks on Forbes’ Annual List of America’s Best Small Companies for 10th Consecutive Year

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October 13, 2010: Quality Systems Chairman of the Board and Founder Sheldon Razin Named Winner in Software Category of TechAmerica’s 52nd Annual Innovator Awards

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July 28, 2010: Quality Systems’ NextDDS Solution Wins 2010 American Business Award

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May 17, 2010: Quality Systems Wins Association for Corporate Growth Award in the Public Company Category

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April 7, 2010: Quality Systems Included in Forbes’ 2009 List of America’s 25 Fastest-Growing Tech Companies Ranking as 23rd

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October 22, 2009: Quality Systems Ranks Third On Forbes Annual List of America’s 200 Best Small Companies

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June 29, 2009: Quality Systems Chairman of the Board and Founder Sheldon Razin Wins 2009 American Business Award’s “Chairman of the Year” Award

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June 15, 2009: Quality Systems Chairman of the Board and Founder Sheldon Razin Named Ernst & Young 2009 Entrepreneur of the Year in Healthcare Category for Orange County/Desert Cities Program

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March 24, 2009: Quality Systems Chairman Sheldon Razin Earns Excellence in Entrepreneurship Award from Orange County Business Journal

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December 1, 2008: Quality Systems Ranks Fourth On Forbes Annual List of America’s 200 Best Small Companies

Background on Shelly Razin

In Mr. Hussein’s proxy materials, he has made a number of complaints about the Board, and in particular the Chairman of the Board, Shelly Razin. Mr. Hussein not only neglects to speak to his own corporate governance record as discussed above, but he notably also fails to discuss the significant contributions of Mr. Razin to the growth and performance of the Quality Systems and the recognition that Mr. Razin has received as a result. Here are some important facts you should know. Mr. Razin:

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Built QSI from an original $2,000 investment to a company with a market value well in excess of $1 billion without any outside or venture capital funding, thousands of customers and an annual revenue run-rate of over $400 million in sales.

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Imparted the vision to indentify and harness emerging technological advances and innovations and identify and meet developing needs in the healthcare industry.

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Led two successful public offerings of QSI stock; QSI’s IPO in 1982 and a secondary offering in 1996.

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Maintained a significant investment in QSI for over 38 years, in stock ownership as well as unwavering commitment to the satisfaction and success of QSI’s shareholders, employees and customers.

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Has provided vision and guidance to develop QSI into a widely acknowledged and award winning leader in healthcare technology. He continues to avail his deep experience and domain expertise to management as Chairman.

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As CEO, identified the need, initiated and directed the search for, and advocated the key acquisitions of both Clinitec and Micromed. He subsequently guided the highly successful integration and merging of these entities into the NextGen division, which now accounts for over 75% of the Company’s consolidated revenue.

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Assembled winning management team with long-term, loyal personnel supported by benefits designed to promote the long term interests of QSI and its shareholders.

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Advocated QSI’s revenue cycle management acquisition strategy, including the acquisition of HSI and over the objection of Ahmed Hussein and his selected Board members.

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Advocated and continues to support QSI dividend program.

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Was named to Advisory Board of the MIT McGovern Institute for Brain Research.

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Has actively founded, financed and guided the growth and success of two other technology companies in the tax accounting field.

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Was named Chairman of the Year in the 2009 American Business Awards,

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Earned the 2009 Ernst & Young Entrepreneur of the Year Award in the Healthcare Category for Orange County and the Excellence in Entrepreneurship Award from the Orange County Business Journal in 2009

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Named the winner in the software category of TechAmerica’s 52nd annual Innovator Awards in 2010.

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Was honored as a Director of the Year in Orange County’s 16th Annual Forum for Corporate Directors Awards in 2011.

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Cast Your Vote Now FOR Our Director Nominees

We urge you to vote FOR:

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Craig Barbarosh

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George Bristol

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Mark Davis

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Russell Pflueger

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Steven Plochocki

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Sheldon Razin

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Lance Rosenzweig

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Maureen Spivack

by signing, dating and returning your WHITE proxy card today. Instructions on how to vote are shown below. If you have any questions or need assistance with voting your WHITE proxy card we encourage you to contact our proxy advisers, MacKenzie Partners, Inc. at (800) 322-2885 or proxy@mackenziepartners.com

For your convenience, the Company has arranged for telephonic and internet voting. Simply follow the instructions that appear on the proxy card.

Voting Instructions: The Board recommends that you

1. Check the “FOR ALL” box on Proposal 1

2. Check the “FOR” box on Proposal 2

3. Check the “FOR” box on Proposal 3

4. Sign and Date the card

Letters to Shareholders & Other Solicitation Materials

Open Letter to Quality Systems, Inc. Shareholders dated June 26, 2012

Open Letter to Quality Systems, Inc. Shareholders dated July 16, 2012

Legal Information

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INFORMATION REGARDING PARTICIPANTS

Information concerning the company and our directors, director nominees, and certain executives who are or may be participants in the solicitation of proxies in connection with the company’s upcoming 2012 annual meeting of shareholders is available in the definitive proxy statement filed by the company with the SEC on July 13, 2012.

ADDITIONAL INFORMATION

On July 13, 2012, the company filed its definitive proxy statement in connection with its 2012 annual meeting of shareholders, and on July 16, 2012, began the process of mailing such proxy statement to its shareholders, together with a WHITE proxy card. Shareholders are strongly advised to read the definitive proxy statement and the accompanying proxy card, as they will contain important information. Shareholders may obtain the definitive proxy statement, any amendments or supplements to such proxy statement, and other documents filed by the company with the SEC for free at the Internet website maintained by the SEC at www.sec.gov. Copies of the definitive proxy statement and any amendments and supplements to such proxy statement may be requested by contacting our proxy solicitor, MacKenzie Partners, Inc. at (800) 322-2885 toll-free or by email at proxy@mackenziepartners.com.

SAFE HARBOR PROVISIONS FOR FORWARD-LOOKING STATEMENTS

Statements made in this document, the proxy statements to be filed with the SEC, communications to shareholders, press releases and oral statements made by our representatives that are not historical in nature, or that state our or management’s intentions, hopes, beliefs, expectations or predictions of the future, may constitute “forward-looking statements” within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended. Forward-looking statements can often be identified by the use of forward-looking words, such as “could,” “should,” “will,” “will be,” “will lead,” “will assist,” “intended,” “continue,” “believe,” “may,” “ expect,” “hope,” “anticipate,” “goal,” “forecast,” “plan,” or “estimate” or variations thereof or similar expressions. Forward-looking statements are not guarantees of future performance.

Forward-looking statements involve risks, uncertainties and assumptions. It is important to note that any such performance and actual results, financial condition or business, could differ materially from those expressed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the risk factors discussed under “Risk Factors” in our Annual Report on Form 10-K for fiscal year ended March 31, 2012, as well as factors discussed elsewhere in this and other reports and documents we file with the SEC.

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Other unforeseen factors not identified herein could also have such an effect. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results, financial condition or business over time unless required by law. Interested persons are urged to review the risks described under “Risk Factors” and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for fiscal year ended March 31, 2012, as well as in our other public disclosures and filings with the SEC.

For fiscal 2013, we expect that revenues will increase in the 20-24% range and we expect earnings per share to grow by 20-25%. With respect to these estimates, we have an annual planning and budgeting process and a continuous reforecasting process, which incorporates inputs from all operating entities to determine short term and long term expectations. As a result of the fiscal 2013 planning and budgeting process, factoring in organic and inorganic growth expectations, we were able to project, with what management believes to be a reasonable probability, the revenue and earnings projections within the stated ranges. The primary input variables and assumptions considered in the planning and budgeting process include the following: existing employee costs, including merit increases and annual bonus expectations; anticipated new hires, both domestically and off-shore, utilizing market-rate pay expectations; major expense assumptions, including facilities, depreciation, communication, systems and infrastructure; cost of sales assumptions based on historical and projected third party costs for hardware, revenue cycle services, consulting services, and third party software applications; revenue expectations based on our pipeline for new system sales; backlog for services and new subscriptions; recurring revenue from our installed base, including contractual consumer price index increases on items such as maintenance; tax rate assumptions based on historical tax rates and anticipated tax credits; interest income assumptions based on current market rate yields, factoring in foreign exchange conversion costs for funding our India captive operations; dilution expectations based on historical run rates of dilution, taking into account our use of common stock for acquisition activities; the existing state and federal regulatory framework with respect to the healthcare sector, including the current stimulus incentives. All assumptions bear inherent risks, limitations and uncertainties, which is the reason we express our forecasts in a range. Without limiting any of the foregoing, the most significant of these uncertainties are in connection with our assumptions regarding new system sales and add on licenses based on conversion ratios for our existing pipeline.

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