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FINRA Settles Case Involving What Looks Like A Felony But Isn't
January 17, 2020
In today's blog we are confronted with criminal conduct by an associated person. In discharging its regulatory role, FINRA promptly investigated the matter and entered into a settlement by which the individual will effectively be disqualified from industry registration. All in all, FINRA did its job in a compelling and timely manner. Notwithstanding that justice seems to have been served, there are still some minor problems with the AWC settlement document, which offers us the opportunity to explore what Wall Street's employees are expected to disclose about their criminal histories.
Case in Point
For
the purpose of proposing a settlement of rule violations alleged by the
Financial Industry Regulatory Authority ("FINRA"), without admitting
or denying the findings, prior to a regulatory hearing, and without an
adjudication of any issue, Rene Moses Torres, Jr. submitted a Letter of
Acceptance, Waiver and Consent ("AWC"), which FINRA accepted.
In the Matter of Rene Moses Torres, Jr., Respondent (FINRA
AWC 2019061034601)
https://www.finra.org/sites/default/files/fda_documents/2019061034601
%20Rene%20Moses%20Torres%2C%20Jr.%20CRD%202035498%20AWC%20sl.pdf
%20Rene%20Moses%20Torres%2C%20Jr.%20CRD%202035498%20AWC%20sl.pdf
Industry Affiliations
Torres' industry employment is somewhat complicated, and this is how the AWC explains his various affiliations:
Respondent entered the securities industry in March 1991 and worked at five FINRA-regulated broker-dealers between that date and November 2018. He joined ING Financial Markets LLC (the "Firm") a FINRA-regulated broker-dealer as an operations clerk from April 2001 to December 2002, and after working in an administrative capacity with two other FINRA-regulated broker-dealers from 2002 to 2007. Respondent associated with the Firm in May 2007 as a Vice President of Operations and remained in that position until he was terminated on November 30, 2018. Respondent became qualified and associated with the Firm as a Series 99 Operations Professional Registered Representative on March 30, 2012 and served as a Fixed Income Settlements specialist for the Firm.
The AWC asserts that Torres
"does not have any disciplinary history with the Securities and Exchange
Commission, any state securities regulators, FINRA, or any other
self-regulatory organization."
2018 Felony Charge
The AWC asserts in the "Overview" section that:
Respondent failed to timely amend his Uniform Application for Securities Industry Registration or Transfer ("Form U4") to disclose that he had been charged with a felony. Respondent was arrested, charged, and taken into police custody on July 18, 2018 but did not disclose the charges to the Firm until November 28, 2018, more than three months after he was required to do so.By failing to timely amend his Form U4, Respondent willfully violated Article V, Section 2(c) of FINRA's By-Laws, and FINRA Rules 1122 and 2010.
The
Rulebook
The Uniform
Application for Securities Industry Registration or
Transfer ("Form U4")
asks:
Criminal Disclosure
14A.
(1) Have you ever:(a) been convicted of or pled guilty or nolo contendere ("no contest") in a domestic, foreign, or military court to any felony?(b) been charged with any felony?. . .
According
to FINRA's online Form
U4 Explanation of Terms:
Charged: Means being accused of a crime in a formal complaint, information, or indictment (or equivalent formal charge).Note the distinction between a mere "arrest" and that of "charged," as set forth online in FINRA "Form U4 and U5 Interpretive Questions and Answers" :
Q3: If a registered person is arrested but not charged with a crime, is the arrest required to be reported?A: No. An arrest without a charge is not required to be reported. (02/13/98)
Article V of FINRA's By-Laws:Application for
Registration, Section 2 in part
states:
(c) Every application for registration filed with the Corporation shall be kept current at all times by supplementary amendments via electronic process or such other process as the Corporation may prescribe to the original application. Such amendment to the application shall be filed with the Corporation not later than 30 days after learning of the facts or circumstances giving rise to the amendment. If such amendment involves a statutory disqualification as defined in Section 3(a)(39) and Section 15(b)(4) of the Act, such amendment shall be filed not later than ten days after such disqualification occurs.
FINRA Rule 1122: Filing of Misleading Information as to Membership or Registration, provides:
No member or person associated with a member shall file with FINRA information with respect to membership or registration which is incomplete or inaccurate so as to be misleading, or which could in any way tend to mislead, or fail to correct such filing after notice thereof.
FINRA Rule 4530. Reporting Requirements provides [Ed: highlighting added]:
(a) Each member shall promptly report to FINRA, but in any event not later than 30 calendar days, after the member knows or should have known of the existence of any of the following:(1) the member or an associated person of the member:(A) has been found to have violated any securities-, insurance-, commodities-, financial- or investment-related laws, rules, regulations or standards of conduct of any domestic or foreign regulatory body, self-regulatory organization or business or professional organization;(B) is the subject of any written customer complaint involving allegations of theft or misappropriation of funds or securities or of forgery;(C) is named as a defendant or respondent in any proceeding brought by a domestic or foreign regulatory body or self-regulatory organization alleging the violation of any provision of the Exchange Act, or of any other federal, state or foreign securities, insurance or commodities statute, or of any rule or regulation thereunder, or of any provision of the by-laws, rules or similar governing instruments of any securities, insurance or commodities domestic or foreign regulatory body or self-regulatory organization;(D) is denied registration or is expelled, enjoined, directed to cease and desist, suspended or otherwise disciplined by any securities, insurance or commodities industry domestic or foreign regulatory body or self-regulatory organization or is denied membership or continued membership in any such self-regulatory organization; or is barred from becoming associated with any member of any such self-regulatory organization;(E) is indicted, or convicted of, or pleads guilty to, or pleads no contest to, any felony; or any misdemeanor that involves the purchase or sale of any security, the taking of a false oath, the making of a false report, bribery, perjury, burglary, larceny, theft, robbery, extortion, forgery, counterfeiting, fraudulent concealment, embezzlement, fraudulent conversion, or misappropriation of funds, or securities, or a conspiracy to commit any of these offenses, or substantially equivalent activity in a domestic, military or foreign court;(F) is a director, controlling stockholder, partner, officer or sole proprietor of, or an associated person with, a broker, dealer, investment company, investment advisor, underwriter or insurance company that was suspended, expelled or had its registration denied or revoked by any domestic or foreign regulatory body, jurisdiction or organization or is associated in such a capacity with a bank, trust company or other financial institution that was convicted of or pleaded no contest to, any felony or misdemeanor in a domestic or foreign court;(G) is a defendant or respondent in any securities- or commodities-related civil litigation or arbitration, is a defendant or respondent in any financial-related insurance civil litigation or arbitration, or is the subject of any claim for damages by a customer, broker or dealer that relates to the provision of financial services or relates to a financial transaction, and such civil litigation, arbitration or claim for damages has been disposed of by judgment, award or settlement for an amount exceeding $15,000. However, when the member is the defendant or respondent or is the subject of any claim for damages by a customer, broker or dealer, then the reporting to FINRA shall be required only when such judgment, award or settlement is for an amount exceeding $25,000; or(H) (i) is subject to a "statutory disqualification" as that term is defined in the Exchange Act; or (ii) is involved in the sale of any financial instrument, the provision of any investment advice or the financing of any such activities with any person that is subject to a "statutory disqualification" as that term is defined in the Exchange Act, provided, however, that this requirement shall not apply to activities with a member or an associated person that has been approved (or is otherwise permitted pursuant to FINRA rules and the federal securities laws) to be a member or to be associated with a member. The report shall include the name of the person subject to the statutory disqualification and details concerning the disqualification; or . . .
Section 3(a)(39) of the Securities Exchange Act provides in pertinent part:
(39) A person is subject to a ''statutory disqualification'' with respect to membership or participation in, or association with a member of, a self-regulatory organization, if such person --
. . .
(F) has committed or omitted any act, or is subject to an order or finding, enumerated in subparagraph (D), (E), (H), or (G) of paragraph (4) of section 15(b) of this title, has been convicted of any offense specified in subparagraph (B) of such paragraph (4) or any other felony within ten years of the date of the filing of an application for membership or participation in, or to become associated with a member of, such self- regulatory organization, is enjoined from any action, conduct, or practice specified in subparagraph (C) of such paragraph (4), has willfully made or caused to be made in any application for membership or participation in, or to become associated with a member of, a self-regulatory organization, report required to be filed with a self-regulatory organization, or proceeding before a self-regulatory organization, any statement which was at the time, and in the light of the circumstances under which it was made, false or misleading with respect to any material fact, or has omitted to state in any such application, report, or proceeding any material fact which is required to be stated therein.
In affirming a "willful" non-disclosure finding
by FINRA, the Securities and Exchange Commission ("SEC") offered a
definition of "willful" In the Matter of the
Application of Michael Earl McCune for Review of Disciplinary Action Taken by
FINRA (Opinion, SEC, '34 Act Rel.
No. 77375; Admin. Proc. File No. 3-16768 / March 15,
2016):
[A] willful violation of the securities laws means "intentionally committing the act which constitutes the violation."16 The laws do not require that the actor "also be aware that he is violating one of the Rules or Acts."17 If McCune voluntarily committed the acts that constituted the violation, then he acted willfully.=====Footnote 16: Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965); see also Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (citing Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949)); Craig, 2008 WL 5328784, at *4 (finding that respondent willfully violated IM 1000-1 and NASD Rule 2110 by providing false answers on his Form U4).Footnote 17: Wonsover, 205 F.3d at 414 (citing Gearheart & Otis, Inc. v. SEC, 348 F.2d 798 (D.C. Cir. 1965)).
Article III of FINRA's By-Laws: Qualifications of Members and Associated Persons provides:
Definition of DisqualificationSec. 4. A person is subject to a "disqualification" with respect to membership, or association with a member, if such person is subject to any "statutory disqualification" as such term is defined in Section 3(a)(39) of the Act.
AWC Settlement
Understanding
I understand that this settlement includes a finding that I willfully omitted to state a material fact on a Form U4, and that under Section 3(a)(39)(F) of the Securities Exchange Act of 1934 and Article III, Section 4 of FINRA's By-Laws, this these omissions make me subject to a statutory disqualification with respect to association with a member.
OHO Willfulness Finding
If you do not opt to settle and
demand your day in court, a FINRA OHO
Decision may state the following:
For willfully failing to timely update Form U4, in violation of Article V, Section 2(c) of NASD's and FINRA's By-laws, NASD IM-1000-1, NASD Rule 2110, and FINRA Rules 1122 and 2010, Respondent is suspended from associating with any FINRA member firm in any capacity for [insert dates] and fined [insert amount]. Because his misconduct was willful, and the information he failed to disclose was material, he is subject to statutory disqualification.
New Jersey's Quirky Criminal Code
After digesting all of the above (and that may result in indigestion), you might come away with the sense that disclosing any felony is not all that complicated an issue to understand and undertake. Of course, as a layperson, you might not be all that clear about the distinction between a mere "arrest" versus a "charge," and then there's the issue of how you might know that you've been formally charged with a felony. That being said, in many (if not most) states, after you have been handcuffed, arrested, taken to some cell, you will be brought before a judge for what's an arraignment, at which time you will likely hear from the judge or your lawyer those magical words about "felony." Whether you will immediately focus on the need to notify your broker-dealer employer or update your Form U4 is a whole other issue -- frankly, when your life is crumbling around you because you've been charged with a felony, you may not be all that concerned about speaking with a compliance officer at your branch office. In fairness to FINRA's disclosure rules, they anticipate the swirl of events and provide you with 30 days after the felony charge before you run afoul of the timely notice requirement.
Whenever we think that something is almost always straightforward, life tends to throw us a curveball. For example, the State of New Jersey's Code of Criminal Justice does NOT characterize ANY criminal offense as a "felony." Imagine you just got home from spending a night in a Joisey jail and you come across this bit of legalese:
New Jersey Code of Criminal Justice Section
2C:1-4. Classes of offensesa. An offense defined by this code or by any other statute of this State, for which a sentence of imprisonment in excess of 6 months is authorized, constitutes a crime within the meaning of the Constitution of this State. Crimes are designated in this code as being of the first, second, third or fourth degree.b. An offense is a disorderly persons offense if it is so designated in this code or in a statute other than this code. An offense is a petty disorderly persons offense if it is so designated in this code or in a statute other than this code. Disorderly persons offenses and petty disorderly persons offenses are petty offenses and are not crimes within the meaning of the Constitution of this State. There shall be no right to indictment by a grand jury nor any right to trial by jury on such offenses. Conviction of such offenses shall not give rise to any disability or legal disadvantage based on conviction of a crime.c. An offense defined by any statute of this State other than this code shall be classified as provided in this section or in section 2C:43-1 and, except as provided in section 2C:1-5b and chapter 43, the sentence that may be imposed upon conviction thereof shall hereafter be governed by this code. Insofar as any provision outside the code declares an offense to be a misdemeanor when such offense specifically provides a maximum penalty of 6 months' imprisonment or less, whether or not in combination with a fine, such provision shall constitute a disorderly persons offense.d. Subject to the provisions of section 2C:43-1, reference in any statute, rule, or regulation outside the code to the term "high misdemeanor" shall mean crimes of the first, second, or third degree and reference to the term "misdemeanor" shall mean all crimes.
That word "felony" doesn't appear on New Jersey's criminal law books. When characterizing crimes, New Jersey's Code references:
- petty disorderly person offenses,
- disorderly person offense, and
- indictable offenses (first, second, third, and fourth degree crimes)
Untimely Update About Felony Charges
In the Matter of Rene Moses Torres, Jr., Respondent, the AWC alleged that his employer ING's:
ING's policies/procedures required its reps to report any felony or misdemeanor arrests to the Firm. Hmmm . . . that's different from FINRA's rules, which only require reporting a formal felony charge or charges involving certain categorized misdemeanors. Which isn't to say that a FINRA member firm can't have more demanding in-house rules (which many do) but, gee, that may confuse some reps, no?[W]ritten policies and procedures in effect at the time of Respondent's arrest requiredregistered representatives to report any felony or misdemeanor arrests to the Firm and to provide amended Forms U4 disclosing any changes to Form U4 information within 30 days of becoming aware of an event, including a felony arrest, requiring such a change.
Then there's the AWC assertion that ING required amended Forms U4 disclosing "a felony arrest." Go take a look at the Form U4. See if you can find an item where you can check off a question about a mere "felony arrest." Also, what are you supposed to make of FINRA's FAQ guidance that a mere "arrest without a charge is not required to be reported"?
July 2018 Arrest and Charges
As explained in the Torres AWC,
Respondent was arrested on July 18, 2018 by Monmouth County police officers and charged in New Jersey Superior Court with the felony crime of endangering the welfare of a child. On July 19, 2018, during his arraignment, Respondent was informed by the Court of the felony charges against him and the serious penalties associated with the charge. The felony charge required Respondent to update his response to question 14A(1)(b) of Form U4 within 30 days thereafter. Respondent willfully failed to disclose the felony charge until November 28, 2018 when the Firm asked him about the arrest, more than three months after he was required to do so. Respondent subsequently entered a guilty plea to the felony charge on March 25, 2019.
FINRA
Sanctions
FINRA deemed Torres cited misconduct to constitute
willful violations of Article V, Section 2(c) of FINRA's By-Laws, and FINRA
Rules 1122 and 2010. In accordance with the terms of the
AWC, FINRA imposed upon Torres a $5,000 fine and an eight-month-suspension from association with any FINRA member in all
capacities. As further noted in the
AWC:
Respondent understands that this settlement includes a finding that he willfully omitted to state a material fact on a Form U4, and that under Section 3(a)(39)(F) of the Securities Exchange Act of 1934 and Article III, Section 4 of FINRA's By-Laws, this omission makes him subject to a statutory disqualification with respect to association with a member.
Bill Singer's Comment
Without question, Torres was "charged" with the equivalent of a "felony," and, as such, he was required to timely amend his Form U4, which he didn't. Accordingly, not only was he fined and suspended but he is now statutorily disqualified. I have no sympathy for Torres and fully support FINRA's conduct as evidenced by the AWC. Is that clear enough for y'all? Having made my position on this settlement clear, let me express some concerns and reservations about the language of the AWC.
My first bit of annoyance is with this portion of the AWC:
The Firm's written policies and procedures in effect at the time of Respondent's arrest required registered representatives to report any felony or misdemeanor arrests to the Firm and to provide amended Forms U4 disclosing any changes to Form U4 information within 30 days of becoming aware of an event, including a felony arrest, requiring such a change. Registered representatives are required to disclose felony charges on their Form U4. Specifically, Form U4 Disclosure Question 14A(1)(b) asked, "Have you ever been charged with any felony?"
First off, the AWC fails to delineate between a mere "arrest" and the more formal "charge;" and conflates ING's in-house compliance policies with FINRA's regulatory rules. While it may be that ING has some in-house requirement for disclosure of mere arrests, that is not FINRA's requirement and is not a disclosable item on the Form U4. As FINRA has clearly enunciated, according to its rules, if a registered person is arrested but not charged with a crime, the mere arrest without a charge is not required to be reported.
Second, the AWC mixes metaphors when it asserts, in part, that:
Respondent was arrested on July 18, 2018 by Monmouth County police officers and charged in New Jersey Superior Court with the felony crime of endangering the welfare of a child. On July 19, 2018, during his arraignment, Respondent was informed by the Court of the felony charges against him and the serious penalties associated with the charge.
As noted in "Howell Trio Charged Amid Child Porn Sweep; Prosecutor / One is an associate director at Princeton; one is a financial services VP at ING, and the third is a student, authorities said" (Patch.com / November 28, 2018)
https://patch.com/new-jersey/howell/financial-services-vp-howell-had-child-porn-prosecutor
As noted in part in the Patch.com article:
As noted in part in the Patch.com article:
Torres, 48, of Gettysburg Drive, who was a vice president of operations for ING Financial Markets, was arrested July 18. He is accused of uploading child pornography to Flikr, Gramiccioni said, and is charged with one count of third-degree endangering the welfare of a child (possession of child pornography). Torres is not listed on the ING Financial Markets website and a Google search turned up no information beyond what was provided by the prosecutor's office.
The AWC should have stated that Torres was "charged with one count of third-degree endangering the welfare of a child (possession of child pornography);" and, thereafter, the AWC should explain that pursuant to FINRA Rule 4530(a)(1)(E), said charge involves what is deemed substantially equivalent activity to that of a felony for regulatory reporting purposes. To be even more exact, New Jersey deems "endangering welfare of children," to be a crime of the first, second, or third degree depending upon the elements charged.
2C:24-4 Endangering welfare of children.a. (1) Any person having a legal duty for the care of a child or who has assumed responsibility for the care of a child who engages in sexual conduct which would impair or debauch the morals of the child is guilty of a crime of the second degree. Any other person who engages in conduct or who causes harm as described in this paragraph to a child is guilty of a crime of the third degree.(2) Any person having a legal duty for the care of a child or who has assumed responsibility for the care of a child who causes the child harm that would make the child an abused or neglected child as defined in R.S.9:6-1, R.S.9:6-3 and P.L.1974, c.119, s.1 (C.9:6-8.21) is guilty of a crime of the second degree. Any other person who engages in conduct or who causes harm as described in this paragraph to a child is guilty of a crime of the third degree. . .. . .(3) A person commits a crime of the first degree if he causes or permits a child to engage in a prohibited sexual act or in the simulation of such an act if the person knows, has reason to know or intends that the prohibited act may be photographed, filmed, reproduced, or reconstructed in any manner, including on the Internet, or may be part of an exhibition or performance. . .
Finally, there is no disclosure whatsoever about Torres' felony charge and guilty plea on his online FINRA BrokerCheck record: https://files.brokercheck.finra.org/individual/individual_2035498.pdf