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Stockbroker Disqualified For Non Disclose Of Grand Jury Investigation
July 31, 2015
Do you know what a Target Letter is? If you don't and you're a Wall Street employee, you might want to take a few minutes and read about one registered person's tale of woe. During the relevant times, he wasn't charged with failing to disclose a felony or misdemeanor charge; he wasn't charged with failing to disclose a felony or misdemeanor conviction; and he wasn't charged with failing to disclose a felony or misdemeanor guilty plea. What he was charged with by FINRA was failing to disclose that he had been notified that he "might" be charged with criminal fraud. You didn't know that was a violation? Ahhhh . . . maybe I just saved your career!
Case In Point
Thomas entered the securities industry in May 2014 with Advisors Asset Management, Inc. (''AAM") and first became registered on June 20, 2014. AAM filed a Uniform Termination Notice for Securities Industry Registration ("Form U5") for Thomas on March 30, 2015, terminating him as of March 11, 2015. The AWC asserts that Thomas did not have any prior disciplinary history.
Grand Jury Investigation
In early January 2015, Thomas allegedly received a letter from the Bexar County, Texas District Attorney's Office notifying him that a Grand Jury was conducting an investigation of of his possible involvement in insurance fraud. The AWC asserts that based upon that Target Letter, Thomas had written notice in early January 2015 that he might be charged or convicted of a misdemeanor or felony involving fraud.
SIDE BAR: Let's start with the "Nots." Thomas was not charged as of the January 2015 Target Letter. Moreover, Thomas was not indicted by that time or asked to plead guilty, not guilty, or no-contest. Finally, he had not been convicted of anything as of that date. Nonetheless, he had been informed that he "might" be charged with a misdemeanor and/or felony fraud. How that "might" comes into play will unfold as you read on.
Going to the Rulebook
Article V of FINRA's By-Laws: Registered Representatives and Associated Persons, provides as follows (Ed: highlighting added):
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 Uniform Application For Securities Industry Registration Or Transfer ("Form U4") asks the following (Ed: highlighting added):
Criminal Disclosure14A.(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?(2) Based upon activities that occurred while you exercised control over it, has an organization ever:(a) been convicted of or pled guilty or nolo contendere ("no contest") in a domestic or foreign court to any felony?(b) been charged with any felony?14B.(1) Have you ever:(a) been convicted of or pled guilty or nolo contendere ("no contest") in a domestic, foreign or military court to a misdemeanor involving: investments or an investment-related business or any fraud, false statements or omissions, wrongful taking of property, bribery, perjury, forgery, counterfeiting, extortion, or a conspiracy to commit any of these offenses?(2) Based upon activities that occurred while you exercised control over it, has an organization ever:(b) been charged with a misdemeanor specified in 14B(1)(a)?(a) been convicted of or pled guilty or nolo contendere ("no contest") in a domestic or foreign court to a misdemeanor specified in 14B(1)(a)?(b) been charged with a misdemeanor specified in 14B(1)(a)?. . .14G.Have you been notified, in writing, that you are now the subject of any:(1) regulatory complaint or proceeding that could result in a "yes" answer to any part of 14C, D or E? (If "yes", complete the Regulatory Action Disclosure Reporting Page.)(2) investigation that could result in a "yes" answer to any part of 14A, B, C, D or E? (If "yes", complete the Investigation Disclosure Reporting Page.)
Willfully Failed
The AWC asserts that Thomas willfully failed to amend his Form U4 to disclose the receipt of the Target Letter, which should have been reflected on his Form U4 by early February 2015. As a result of the foregoing conduct, Thomas allegedly violated Article V, Section 2(c) of FINRA's By-Laws, and FINRA Rules 1122 and 2010..
Sanctions
In accordance with the terms of the AWC, FINRA imposed upon Thomas a $5,000 fine and a six-month suspension from association with any FINRA member in any capacity.
The AWC contains the following admonition:
I understand that this settlement includes a finding that I willfully omitted 10 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 Ill, Section 4 of FINRA's By-Laws, this omission makes me subject to a statutory disqualification with respect to association with a member.
Thomas appears to have been sanctioned with merely a $5,000 fine and a six-month suspension. That's not really the end of it. Beyond the fine and suspension was the a finding by FINRA that Thomas's U4 amendment failure was "willful} -- and that one-word results in Thomas being statutorily disqualified. As a result, when his six-month suspension is up, he still can't simply show up at work and continue his registered career. To the contrary, he will either need special permission to remain in the industry or, if he is terminated before the suspension is completed, he will need to have a prospective FINRA member firm employer fill out on his behalf a "Membership Continuance Application (the "Form MC-400"). Thereafter, Thomas will have to submit to a rather laborious process by which FINRA will consider whether to permit him resume the now disqualified registered activities.