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by Bill Singer
 
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Written: February 27, 2015

If you were lucky to dodge a regulatory bullet, don't count on your deft footwork to bail you out a second time.  In a recent FINRA regulatory settlement, we have the circumstance of a registered person who improperly charged his firm's credit card for personal expenses and managed to resolve things via a relatively modest suspension and a fine.  Unfortunately, it was a short-lived reprieve and the second time he was named as a Respondent in a regulatory matter, his career would end in flames.

Case In Point

For the purpose of proposing a settlement of rule violations alleged by the Financial dustry Regulatory Authority (“FINRA”), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, David Randolph Haase submitted a Letter of Acceptance, Waiver and Consent (“AWC”), which FINRA accepted. In the Matter of David Randolph Haase, Respondent (AWC  #2014039865701, February 24, 2015).

In 1994, Haase was first registered with a FINRA member firm and thereafter was registered with several firms. For purposes of this AWC, the following registrations are noted:
  • April 2010 through June 2011: BMO Capital Markets Corp.;
  • September 2011 until February 2012: Suntrust Robinson Humphrey, Inc
  • June 2012 to January 14, 2014: White Oak Merchant Partners LLC
February 2014 AWC


David Randolph Haase (CRD #2534907, Registered Representative, Wayne, Pennsylvania) submitted a Letter of Acceptance, Waiver and Consent in which he was fined $20,000, suspended from association with any FINRA member in any capacity for six weeks, and required to remain current with required payments to his former member firm. Without admitting or denying the findings, Haase consented to the described sanctions and to the entry of findings that he improperly charged personal expenses to his firm-issued credit card and improperly used the firm’s car service account for personal travel. The findings stated that the firm’s WSPs prohibited employees’ personal use of the corporate credit card and firm car service account. In Haase’s department, in certain limited circumstances, employees were permitted to use the corporate credit card and firm car service for personal expenses and travel, as long as they reimbursed the firm within a reasonable time, usually within 30 days of the transaction date. Haase charged personal expenses on the corporate credit card but failed to timely submit expense reports to the firm, reconcile expenses or timely and fully reimburse the firm. The findings also stated that Haase entered into a written agreement with the firm to repay the agreed-upon amount of outstanding personal corporate credit card and car service expenses totaling approximately $40,000.
The suspension is in effect from January 21, 2014, through March 3, 2014. (FINRA Case #2011028452902).

Pursuant to FINRA’s online BrokerCheck records as of February 27, 2015, Haase was “Discharged” by BMO on June 8, 2011, based upon allegations:

USE OF CORPORATE CRDIT [sic] CARD AND CAR SERVICE FOR PERSONAL EXPENSES CONTRARY TO COMPANY POLICY

Judgments and a Bankruptcy

The current AWC alleged that between February 2010 and January 2014, Haase "willfully" failed to timely amend his Uniform Application for Securities Industry Registration or Transfer ("Form U4"). The AWC asserts that Haase was required to disclose the following events (the dates of the Form U4 disclosures are noted with the times in excess of timely notice set forth in parenthesis): 
  • January 14, 2010, Haase filed for Chapter 11 bankruptcy: April 20, 2010 (63 days);
  • January 7,2011, a $238,000 civil judgment: January 10, 2014 (2 years and 11 months);
  • March 12,2012, a $71,960 civil judgment: January 10, 2014 (2 years and 9 months); and 
  • February 12,2013, a $70,321 civil judgment: January 10, 2014 (10 months).
Additionally, between 2011 and 2013, the AWC alleged that Haase falsely attested on annual compliance questionnaires at BMO, Suntrust and White Oak that he did not have any unsatisfied judgments.

Article V of FINRA’s By-Laws: Registered Representatives and Associated Person, provides as follows:

Application for Registration

Sec. 2.  (a) Application by any person for registration with the Corporation, properly signed by the applicant, shall be made to the Corporation via electronic process or such other process as the Corporation may prescribe, on the form to be prescribed by the Corporation and shall contain:
(1) an agreement to comply with the federal securities laws, the rules and regulations thereunder, the rules of the Municipal Securities Rulemaking Board and the Treasury Department, the By-Laws of the Corporation, NASD Regulation, and NASD Dispute Resolution, the Rules of the Corporation, and all rulings, orders, directions, and decisions issued and sanctions imposed under the Rules of the Corporation; and
(2) such other reasonable information with respect to the applicant as the Corporation may require.
(b) The Corporation shall not approve an application for registration of any person who is not eligible to be an associated person of a member under the provisions of Article III, Section 3.
(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.

In addition to the above By-Law provision, 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.

Finally, the Form U4 asks the following:

Financial Disclosure
14K. Within the past 10 years:
(1) have you made a compromise with creditors, filed a bankruptcy petition or been the subject of an involuntary bankruptcy petition?
(2) based upon events that occurred while you exercised control over it, has an organization made a compromise with creditors, filed a bankruptcy petition or been the subject of an involuntary bankruptcy petition?
(3) based upon events that occurred while you exercised control over it, has a broker or dealer been the subject of an involuntary bankruptcy petition, or had a trustee appointed, or had a direct payment procedure initiated under the Securities Investor Protection Act?
14L. Has a bonding company ever denied, paid out on, or revoked a bond for you?
14M. Do you have any unsatisfied judgments or liens against you?

The Impact of Willfulness

The finding of willful (intentional) failure to timely disclose a material fact as required on the Form U4 will expose you to a statutory disqualification.  For those of you who enjoy a good puzzle, here’s the language from the cited section of the Securities Exchange Act:

(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.

Summing It Up

As noted in the February 2014 AWC, Haase undertook to remain current with the terms of a written agreement with BMO that required him to repay $40,000 to the firm in $1,000 monthly installments beginning October 2013. The 2015 AWC asserts that he honored the first five months of that undertaking to the amount of $5,000 but failed to make any further payments, in violation of the AWC and, accordingly, FINRA Rule 2010. 

Additionally, Haase was deemed to have willfully failed to timely amend his Form U4 to disclose the three judgments and the bankruptcy in violation of  he Between 2010 and 2014, Haase failed to timely amend his Uniform Application Article V, Section 2(c) of the FINRA By-Laws and FINRA Rules 1122 and 2010. In accordance with the terms of the 2015 AWC, FINRA imposed upon Haase a Bar from association with any FINRA member in any capacity.

As set forth in the 2015 AWC, Haase acknowledged the impact of the “willful” finding:

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 omission makes me subject to a statutory disqualification with respect to association with a member.

 

Written: February 26, 2015

Sometimes a cigar is a cigar. Sometimes a fish is a fish -- or a grouper. Sometimes, however, federal prosecutors would have you believe that a fish is a digital drive on which evidence is written and archived and .  . . well, you know how the Law can be.  In today's BrokeAndBroker.com Blog, we come across an equally provocative and absurd United States Supreme Court case, where we find a fisherman facing 20 years in federal prison for throwing fish overboard. Think I'm kidding? Consider this quote from the oral argument:

CHIEF JUSTICE ROBERTS:  But the point is that you could, and the point is that once you can, every time you get somebody who is throwing fish overboard, you can go to him and say:  Look, if we prosecute you you're facing 20 years, so why don't you plead to a year, or something like that.  It's an extraordinary leverage that the broadest interpretation of this statute would give Federal prosecutors.

Miss Katie

The commercial fishing boat Miss Katie was six days on the Gulf of Mexico with a crew of three, including Captain John L. Yates, when, on August 23, 2007, Officer John Jones of the Florida Fish and Wildlife Conservation Commission boarded the vessel, which was in federal waters at that time of boarding but purportedly still within Officer Jones’ jurisdiction as a deputized National Marine Fisheries Service federal agent. 

And now our fish story grows . . . or perhaps shrinks would be a more apt telling of this tale. Officer Jones comes across three red grouper hanging from a hook on deck, and he believes the fish are  under the 20 inches regulation that require their immediate release if undersized. Apparently smelling a bad catch, Officer Jones inspects the balance of the ship’s catch and measures 72 undersized fish. A fellow officer records the measurements, which reveal that most of the 72 fish at issue were between 19 and 20 inches, with only three under that range but none less than 18.75 inches.

Groupin' Grouper

Putting aside his rulers, Officer Jones directed Yates to leave the undersized fish separated from the balance of his catch in wooden crates until returning to port. Prior to departing, Officer Jones issued Yates a citation.  When the Miss Katie docked four days later in Cortez, FL, Officer Jones was back on the scene, re-measuring the segregated fish in the crates. To his apparent surprise, all of the undersized fish were still under 20 inches but now somewhat longer than previously measured at sea. Officer Jones apparently sensed some form of tampering – and, under questioning, crew members admitted that they had thrown overboard the previously measured fish and replaced them with other grouper.

Mugshot of Confidential Informant Lester a/k/a "Fish Face" Grouper


Three Years Before The Mast

Inexplicably, the calendar advances from 2007 to May 5, 2010, at which time criminal charges are lodged against Yates, who was indicted for destroying property to prevent federal seizure; and for destroying, concealing, and covering up undersized fish to impede a federal investigation.  What the hell took three years? I dunno. Maybe the feds were taking their time reeling in this defendant. Notably, by 2010, the legal minimum for Gulf red grouper had been reduced from 20 to 18 inches (of which none of the cited catch was of such a diminutive stature).

Tangible Object -- As In Gulf Grouper?

Consider the federal statutes under which Yates was charged in the United States District Court for the Middle District of Florida ("MDFL"):
  • 18 U.S. Code § 1519 - Destruction, alteration, or falsification of records in Federal investigations and bankruptcy
Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.
  • 18 U.S. Code § 2232 - Destruction or removal of property to prevent seizure
(a)Destruction or Removal of Property To Prevent Seizure.— Whoever, before, during, or after any search for or seizure of property by any person authorized to make such search or seizure, knowingly destroys, damages, wastes, disposes of, transfers, or otherwise takes any action, or knowingly attempts to destroy, damage, waste, dispose of, transfer, or otherwise take any action, for the purpose of preventing or impairing the Government’s lawful authority to take such property into its custody or control or to continue holding such property under its lawful custody and control, shall be fined under this title or imprisoned not more than 5 years, or both. . .

Four Day Trial

Facing up to 20 years in prison on  §1519, after a four-day trial in August 2011, the MDFL jury found Yates guilty of knowingly disposing of undersized fish in order to prevent the government from taking lawful custody and control of them, in violation of 18 U.S.C. § 2232(a); and destroying or concealing a “tangible object with the intent to impede, obstruct, or influence” the government’s investigation into harvesting undersized grouper, in violation of 18 U.S.C. § 1519. 

Last Known Photo of Lester "Fish Face" Grouper


11th Circuit Appeal

MDFL sentenced Yates to 30 days’ imprisonment, followed by 36 months’ supervised release. Yates appealed to the 11th Circuit and argued that MDFL had
  1. erred in denying his motion for judgment of acquittal on Counts I and II, because the government failed to present sufficient evidence to prove the fish thrown overboard were undersized;
  2. erred as a matter of law in denying his motion for judgment of acquittal on Count II, because the term “tangible object” as used in 18 U.S.C. § 1519 does not apply to fish; or in the alternative, the statute is ambiguous and the rule of lenity should apply; and
  3. abused its discretion by precluding him from calling an expert during his case-in-chief.
The MDFL conviction was sustained on appeal by the 11th Circuit, which interpreted “tangible object” pursuant to its “ordinary or natural meaning.” United States of America, Plaintiff-Appellee, v. John L. Yates, Defendant-Appellant (Opinion, United States Court of Appeals for the 11th Circuit; 10-CR-00066; 11-16093, August 16, 2013)  

Supreme Court Appeal

On appeal, the United States Supreme Court reversed the 11th Circuit and remanded for further proceedings. Yates v. United States (Opinion, US Supreme Court, 13-7451, February 25, 2015).  As set forth in the Supreme Court's Official Syllabus:

Syllabus

JUSTICE GINSBURG, joined by THE CHIEF JUSTICE, JUSTICE BREYER, and JUSTICE SOTOMAYOR, concluded that a “tangible object” within §1519’s compass is one used to record or preserve information. Pp. 6– 20. 

(a) Although dictionary definitions of the words “tangible” and “object” bear consideration in determining the meaning of “tangible object” in §1519, they are not dispositive. Whether a statutory term is unambiguous “is determined [not only] by reference to the language itself, [but also by] the specific context in which that language is used, and the broader context of the statute as a whole.” Robinson v. Shell Oil Co., 519 U. S. 337, 341. Identical language may convey varying content when used in different statutes, sometimes even in different provisions of the same statute. See, e.g., FAA v. Cooper, 566 U. S. ___, ___. Pp. 7–10. 

(b) Familiar interpretive guides aid the construction of “tangible object.” Though not commanding, §1519’s heading—“Destruction, alteration, or falsification of records in Federal investigations and bankruptcy”—conveys no suggestion that the section prohibits spoliation of any and all physical evidence, however remote from records. 

Section 1519’s position within Title 18, Chapter 73, further signals that §1519 was not intended to serve as a cross-the-board ban on the destruction of physical evidence. Congress placed §1519 at the end of Chapter 73 following immediately after pre-existing specialized provisions expressly aimed at corporate fraud and financial audits. 

The contemporaneous passage of §1512(c)(1), which prohibits a person from “alter[ing], destroy[ing], mutilat[ing], or conceal[ing] a record, document, or other object . . . with the intent to impair the object’s integrity or availability for use in an official proceeding,” is also instructive. The Government argues that §1512(c)(1)’s reference to “other object” includes any and every physical object. But if §1519’s reference to “tangible object” already included all physical objects, as the Government also contends, then Congress had no reason to enact §1512(c)(1). Section 1519 should not be read to render superfluous an entire provision passed in proximity as part of the same Act. See Marx v. General Revenue Corp., 568 U. S. ___, ___. 

The words immediately surrounding “tangible object” in §1519— “falsifies, or makes a false entry in any record [or] document”—also cabin the contextual meaning of that term. Applying the canons noscitur a sociis and ejusdem generis, “tangible object,” as the last in a list of terms that begins “any record [or] document,” is appropriately read to refer, not to any tangible object, but specifically to the subset of tangible objects used to record or preserve information. This moderate interpretation accords with the list of actions §1519 proscribes; the verbs “falsif[y]” and “mak[e] a false entry in” typically  take as grammatical objects records, documents, or things used to record or preserve information, such as logbooks or hard drives. See Gustafson v. Alloyd Co., 513 U. S. 561, 575. 

Use of traditional tools of statutory interpretation to examine markers of congressional intent within the Sarbanes-Oxley Act and §1519 itself thus call for rejection of an aggressive interpretation of “tangible object.”

Furthermore, the meaning of “record, document, or thing” in a provision of the 1962 Model Penal Code (MPC) that has been interpreted to prohibit tampering with any kind of physical evidence is not a reliable indicator of the meaning Congress assigned to “record, document, or tangible object” in §1519. There are significant differences between the offense described by the MPC provision and the offense created by §1519. Pp. 10–18. 

(c) Finally, if recourse to traditional tools of statutory construction leaves any doubt about the meaning of “tangible object” in §1519, it would be appropriate to invoke the rule of lenity. Pp. 18–19. 

JUSTICE ALITO concluded that traditional rules of statutory construction confirm that Yates has the better argument. Title 18 U. S. C. §1519’s list of nouns, list of verbs, and title, when combined, tip the case in favor of Yates. Applying the canons noscitur a sociis and ejusdem generis to the list of nouns—“any record, document, or tangible object”—the term “tangible object” should refer to something similar to records or documents. And while many of §1519’s verbs— “alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in”—could apply to far-flung nouns such as salamanders or sand dunes, the term “makes a false entry in” makes no sense outside of filekeeping. Finally, §1519’s title—“Destruction, alteration, or falsification of records in Federal investigations and bankruptcy”— also points toward filekeeping rather than fish. Pp. 1–4.

GINSBURG, J., announced the judgment of the Court and delivered an opinion, in which ROBERTS, C. J., and BREYER and SOTOMAYOR, JJ., joined. ALITO, J., filed an opinion concurring in the judgment. KAGAN, J., filed a dissenting opinion, in which SCALIA, KENNEDY, and THOMAS, JJ., joined.



 

Written: February 25, 2015

In some ways, this disaster started out admirably with a registered representative father trying to find a way to leave his book of business for his son. The Devil is in the details and how the father went about his plans made all the difference -- and not in a good way. After moving through the FINRA disciplinary process, we wind up at the SEC, not once but twice.

Case In Point

Steven Robert Tomlinson entered the financial industry in 1981, and over a 20 year span worked for various firms before joining a Corning , NY credit union in 2001 as a financial advisor in its investment services group –by 2003, he became the group manager. During the relevant times in this matter, the credit union was affiliated with Financial Industry Regulatory Authority (“FINRA”) member firm Raymond James Financial Services, Inc. (“RJFS”), and Tomlinson was an employee of both the credit union and registered with RJFS.

Salary Versus Commission

In 2008, Tomlinson learned from a magazine article that a registered representative with whom he had trained years earlier had built a business at another broker-dealer firm to pass along to his son. That success story seemed to have troubled Tomlinson, who also desired to leave a business for his son but was growing concerned about the inherent limitations in his credit union’s salary-based compensation system versus the brokerage industry’s commission structure. Consequently, the magazine article may have fanned the embers of Tomlinson’s desire to move on and move up.

Walkin’ Over To Wachovia

Toward the end of June 2008, Tomlinson began talking to a friend at Wachovia about an opening in a nearby branch office; and in October 2008, Tomlinson visited a St. Louis, MO, Wachovia office. Tomlinson must have liked the grass on the other side of the fence because he soon decided to leave the credit union and RJFS to join Wachovia, where his new position offered a small payment for managing the branch coupled with the potential for much greater commission-based compensation.

You’re On Notice

As a credit union manager, Tomlinson was familiar with the organization’s compliance manual, which, in pertinent part stated:

Associates may not share customer information with third parties unless specifically authorized by the client. Customer and confidential information may not be removed from a Raymond James office without the branch manager’s permission.

Further, the credit union’s compliance manual prohibited financial associates (subject to client authorization) from transmitting non-public or personally identifiable information (e.g., social security number, financial account numbers, net worth, income, tax bracket) to a third party for non-business purposes.  Also, Tomlinson had signed a financial advisor agreement with RJFS and the credit union in which he agreed, among other things, not to remove records from the premises of the investment group without prior authorization and not to disclose to any person any non-public customer information.

Wachovia’s Instructions

In contemplation of his joining Wachovia, that firm had instructed Tomlinson that the only information he could bring with him was in the nature of a “Christmas card list;” i.e., the names, phone numbers and addresses of his clients. Wachovia conveyed the instruction several times in several different ways, including during a discussion at the St. Louis recruiting meeting and also memorialized in a “Financial Advisor Integration Planner” given to Tomlinson by the senior vice president who had handled his recruitment.  

The Planner stated in bold-face type that financial advisors were not allowed to bring “client statements, account numbers, social security numbers, client files, confirmation, performance reports, copies of notes or any electronically stored client data;” however, exceptions were noted for certain allowable information, such as, customer name, client name, account title, their address, phone numbers, and their e-mail addresses.

Down Low Download

During business hours and late at night on November 18th and November 20th, without authorization and prior notice to the credit union, RJFS, or Wachovia, Tomlinson downloaded confidential, non-public information of over 2000 credit union customers (e.g., social security numbers, birth dates, account numbers, and account balances) to his personal flash drive (unencrypted and lacking password protection) and his personal laptop. Wachovia provided Tomlinson with a firm-issued flash drive that he was supposed to use to download only the limited information that he was permitted to take with him, but he claimed to have had difficulty making the software work and downloaded information onto his personal flash drive. Although some of the clients involved on the downloaded files were Tomlinson’s, about 60% were customers of other credit union financial advisors with whom he had previously had contact or were total strangers.

Formal Resignation

Tomlinson officially resigned from the credit union on November 24, 2008, Monday, and on that day he spoke with a number of people at the union and participated in an exit interview with an IT person. In keeping with the union’s standard procedure, the IT person conducted an exit interview and received from a departing employee any physical keys and badges, including the Virtual Private Network (“VPN”) token used to access the union’s computer systems. Tomlinson returned a VPN token, his keys, and other things to union staff.

The credit union’s protocol was that if a departing credit union employee had:

  • access to the credit union’s computer network through a mobile telephone owned by the employee, any credit union software and information would be erased from the phone, which, thereafter, was returned;
  • a corporate issued laptop, the laptop would be taken back. (It was against policy for employees to use personal laptops for credit union work, and so a personal laptop would not ordinarily be requested or examined in the exit interview).

On the afternoon of November 24th, a credit union IT person “wiped clean” the telephone that the credit union had purchased for Tomlinson’s use and returned the device with only his personal information. Notably, there was no discussion of Tomlinson’s flash drive or personal laptop during the exit interview or wiping process.

Admin Asst

Shortly before 6 p.m. on the day of his resignation, Tomlinson met with a Wachovia administrative assistant, who had been assigned to help Tomlinson prepare announcements about his move. The assistant, who had been waiting for Tomlinson all afternoon, asked him for the flash drive, but he had neglected to bring it and went home to retrieve the device. Upon his return later that evening, a snowstorm was underway, prompting Tomlinson and the assistant to defer to the next day the creation of a mailing announcing his relocation. The assistant put the flash drive in her purse and went to a hotel. Tomlinson went home.

The next day, November 25, 2008, Tuesday, the administrative assistant used the flash drive at a computer in the public reception area of the Wachovia office. Tomlinson did not supervise her work and was in a separate office that had been assigned to him. The assistant had difficulty using the flash drive and called Wachovia’s IT department, which remotely accessed the disk to assist her. The disk remained in the reception area until after lunch, by which time Tomlinson and the assistant had examined and culled labels for the mailing. Finally, around  2-3 p.m., the assistant gave the flash drive back to Tomlinson.

Credit Union Investigation

On November 26, 2008, Wednesday, one day before Thanksgiving, the credit union CEO asked the credit union CIO to begin an investigation because the CEO had been informed that a customer had received a mailing from Tomlinson, in potential violation of the former employee’s non-compete agreement. The CIO started by looking at Tomlinson’s desktop computer, which disclosed that customer information had been downloaded onto a remote storage device (such as a flash drive) and put into a directory that Tomlinson had labeled in a way to denote a connection with Wachovia Securities.

On December 1, 2008, the credit union drafted and delivered a letter to Tomlinson at Wachovia demanding, among other things, the return of the flash drive with the “stolen” information on it. Tomlinson found the letter “scary,”  and, thereupon, he deleted downloaded flash drive files except for the one file containing his own clients’ data. He also deleted credit union files from his personal laptop. Upon learning of these deletions, Wachovia’s attorney instructed Tomlinson to stop.

Eventually, Tomlinson returned to the credit union his flash drive, mobile telephone, and personal laptop; and the union’s CIO determined that customer information had been on all three of Tomlinson’s devices and that most of those files had been deleted after Tomlinson was informed of the investigation.  The CIO requested that Wachovia check its computers and was subsequently informed that Wachovia had identified at least one subject file on a secretary’s computer at Wachovia.

FINRA Files Charges

In response to the filing of a disciplinary Complaint by FINRA’s Department of Enforcement, Tomlinson sought to characterize his actions as thoughtless and not motivated by any desire to harm his former employer.  Further, Tomlinson contended that  notwithstanding his copying of customer files, the credit union was unharmed because only the names and addresses of his own clients were used to create address labels for “tombstone” announcements of his move to his new firm. FINRA Department of Enforcement, Complainant, v. Steven Robert Tomlinson, Respondent (OHO Hearing Panel Decision, March 21, 2013).

Following a hearing, a FINRA Hearing Panel essentially shredded what they viewed as excuses and somewhat self-serving explanations set forth by Tomlinson, which the panel characterized as constituting three points.

First, Tomlinson argued that he lacked intent to do wrong or to cause harm – he asserted that his conduct was something of a spur of the moment undertaking in which he “just didn’t think at the time.” Noting that the Rule 2110 violation with which he had been charged did not require proof of intent, the Panel further noted that the evidence suggested at least Tomlinson’s consciousness of wrongdoing. In raising that prospect, the Panel pointed at Tomlinson’s after hours and fairly surreptitious downloading; and his failure to even mention during the exit interview that he had customer information on a flash drive and personal laptop.

Second, Tomlinson argued that he had used only a limited portion of the downloaded information and only for a legitimate purpose; namely his client file to fabricate “tombstone” notices of his move to Wachovia.” In contradistinction to Tomlinson’s benign characterization, the Panel seemed perplexed by his inability to recognize the potential disaster that could have resulted from the misuse of the personal information on the files that were resident on an unencrypted, non-password-protected device, which was left unattended in a relatively public space.

Third, Tomlinson asserted that the credit union had known for a long time prior to his departure that he had used his personal devices for business purposes, downloading client information in order to work at home.  This argument seems to have rankled the Panel, which rejected the attempt to “explain away his actions as an innocent or inadvertent mistake.” In response to Tomlinson’s suggestion that he had been somewhat victimized by the credit union’s unfair and overly harsh response that included  notifying customers that their confidentiality had been breached, the Panel interpreted this point,  as an inappropriate attempt to focus “not on the customers’ interest in keeping their highly sensitive information private, but rather on his view that the credit union has nothing to complain about.”

In A Nutshell

The FINRA Hearing Panel saw the key issue presented by Tomlinson’s conduct as one in which the investing public cannot be expected to have confidence in the financial industry if investors’ confidential, non-public information is not protected from disclosure. Further, when deliberating on the sanctions to be imposed, the Panel found as aggravating factors, Tomlinson’s:

  • attempt to conceal his conduct;
  • efforts to avoid detection; and
  • potential financial gain from his misconduct.

Accordingly, the Panel found that Tomlinson had violated NASD Rule 2110 and imposed the following sanctions:

  • $10,000 fine;
  • 10-business-day suspension;
  • $2,990.42 in costs

NAC Appeal

Following Tomlinson’s pro se appeal of the OHO Decision, FINRA’s National Adjudicatory Council (“NAC”) affirmed the findings of the OHO and the $10,000 fine, but increased the 10-business-day suspension to a 90-day suspension in all capacities.  The NAC refrained from imposition of the fine and costs based upon Tomlinson's demonstrated inability to pay. In the Matter of FINRA Department of Enforcement, Complainant, vs. Steven Robert Tomlinson, Respondent, (NAC, 2009017527501, March 5, 2014).

The NAC's rationale for not imposing the fine offers some helpful insight as to the factors that are considered in determining whether to waive such payment:

Tomlinson has demonstrated a bona fide inability to pay. Thc record shows that since 2010 nearly all of Tomlinson's monthly net income has serviced a loan to him from Wells Fargo, and consequently, he does not have sufficient funds remaining to pay his family's other living expenses (which are significant). The bank holding liens on Tomlinson's real property (a primary residence and a home that for years has been in his family) has initiated foreclosure proceedings, and he is delinquent on numerous payments to other creditors. Tomlinson has also borrowed against his retirement savings, and represents that he has listed his primary residence and a boat for sale (which also appears to be encumbered). Simply put, Tomlinson does not earn nearly enough monthly income to pay his expenses on a going basis, has not for some time, and does not appear to have any realistic ability to borrow or otherwise raise additional funds . . .

Enforcement argues that Tomlinson's reported assets, by virtue of his own calculations, significantly exceed his reported liabilities. Enforcement, however, fails to account for the fact that the large majority of Tomlinson's net worth consists of equity in real property that is currently in foreclosure. We would be remiss if we did not consider that realization of any equity in these illiquid assets is no longer entirely in Tomlinson's control. In these unusual circumstances, a simple, mechanical calculation of net worth does not accurately and completely reflect Tomlinson's financial condition and ability to pay monetary sanctions. . . While we acknowledge that Tomlinson did not initially explain how he determined the value of his assets and did not provide complete documentation for each of his numerous liabilities, we find that Tomlinson has shown that he has a bona fide inability to pay the monetary sanctions we otherwise would impose upon him. Thus, given these facts, we do not impose the fine, nor do we order that Tomlinson pay costs.

Page 13 of the NAC Decision

Inability To Pay

The "inability to pay" factors enunciated in Tomlinson by the NAC should serve as a helpful guideline for those respondents seeking excusal of the payment of regulatory fines, costs, fees, etc. As noted by the NAC, the "mere excess of assets over liabilities is not determinative."

In Tomlinson, the NAC determined that nearly all of the respondent's net monthly income was allocated to payment of financial obligations and there was no excess available to service the regulatory sanctions. In reaching this conclusion, the NAC analyzed the nature of family/living expenses, debt, and current delinquencies. Following that inquiry, the NAC found that Tomlinson did not "earn nearly enough monthly income to pay his expenses on a going basis, has not for some time, and does not appear to have any realistic ability to borrow or otherwise raise additional funds."

SEC Appeal

Tomlinson appealed FINRA's findings and sanctions to the Securities and Exchange Commission ("SEC"), which sustained the self-regulatory organization. In The Matter Of The Application Of Steven Robert Tomlinson For Review Of Disciplinary Action Taken By FINRA (Opinion, SEC, ’34 Act Release No. 73825; Admin. Proc. File No. 3-15824 / December 11, 2014).  In considering some of the issues Tomlinson raised in his pro se capacity on appeal, the SEC tackled his complaint that the NAC had increased the length of his OHO-imposed suspension from 10 to 90 days:

Tomlinson argues that the NAC increased the suspension to "offset" his inability to pay the fine and as "retribution" for his appeal. But the "mere fact that the NAC increased the sanctions . . . does not render the [sanctions] invalid on fairness grounds."64 Tomlinson states that the NAC's refusal to impose the fine is "extremely helpful," but contends that the suspension "is 'far more costly' . . . to a career that has lasted 32 years without a customer complaint."65 Tomlinson asserts that "[a]lot has been learned over the past 5 1/2 years" and that he is "more than contrite and extremely remorseful for the impact [this action] has had on [his] family." While we acknowledge Tomlinson's concerns, we have stated previously that "[h]ow a respondent collaterally suffers as a result of the violation, or from the disciplinary proceeding that followed (e.g., that he lost money, the amount of time he was out of the industry, or the impact the disciplinary proceeding had on his reputation, career, or finances) is not a mitigating factor."66

Pages 18 -19 of the SEC Opinion

Request for Reconsideration

On January 8, 2015, Tomlinson submitted a letter to the SEC seeking a reconsideration of the December 11, 2014 Opinion and Order sustaining FINRA’s findings and sanctions against him. In The Matter Of The Application Of Steven Robert Tomlinson For Review Of Disciplinary Action Taken By FINRA (Opinion, SEC, ’34 Act Release No. 74354; Admin. Proc. File No. 3-15824 / February 23, 2015). In making short shrift of the Tomlinson's request for reconsideration, the SEC not only found the application for reconsideration to be lack merit, but the federal regulator further admonished that:

We have construed Tomlinson's letter as a request for reconsideration and reject his
request on two independent grounds: it is untimely and lacks merit. Rule of Practice 470 provides, in relevant part, that a motion for reconsideration "shall be filed within 10 days after service of the order complained of." 4  Tomlinson was served with a copy of the December 11 Order on December 15, 2014 and received it on December 22, 2014, but his letter was not filed until January 9, 2015, which was beyond the ten-day period provided in Rule 470. As a result, Tomlinson's request for reconsideration of the December 11 Order was untimely.

Pages 2 of the SEC Reconsideration Opinion

Bill Singer’s Comment

Succinct and compelling decisions from FINRA's OHO and the NAC, and from the SEC. Not only do the rulings offer the necessary background to make the case intelligible, but each offers context in its rationale to allow us to understand the appropriateness of the imposed sanctions. Moreover, the NAC offered a thoughtful analysis of "inability to pay" factors that puts FINRA enforcement staff on notice that it's not a simple numbers game in considering requests for relief based upon a purported inability to pay.


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