Inconsistent FINRA Findings of Willful Nondisclosure Persist

Tax season is upon us and many Wall Street registered persons may be unable to pay their taxes. It's not something unique to the securities industry. Lots of folks can't pay their tax bills. In some cases, they miscalculated what they owed. In other cases, misfortune or folly has wiped out their bank accounts. For those in the biz, however, on top of trying to come up with some work-out for your tax debt, there is also the obligation to disclose various financial developments to your employer and regulators. In some cases the mere whiff of financial difficulties may get you fired: A consideration that often prompts such debtors to cross their fingers, not disclose what they know they must, and hope that no one finds out. It's a lousy bet and a gambit that may not only end with the likely discovery of the debts but it may cost the non-disclosing individual a career.

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.

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.

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?

such person . . . has willfully made . . . in any application for membership or participation in, or to become associated with a member of, a self-regulatory organization, . . . any statement which was at the time, and in 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 . . . report . . . any material fact which is required to be stated therein."

I understand that this settlement includes a finding that I willfully omitted to state a material facts 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.

On September 2, 2008, the State of Indiana filed a tax lien against Eckstein. On August 13, 2010, the State of Indiana filed a second tax lien against Eckstein. On December 4, 2012, the State of Indiana filed a third lien against Eckstein. Eckstein became aware of the September 2008 tax lien on or about November 2010. She became aware of the August 2010 and December 2012 tax liens in December 2012. Eckstein failed to amend her Form U4 to reflect the three state tax liens in violation of Article V, Section 2(c) of FINRA's By-Laws, as well as FINRA Rules 1122 and 2010.

THE COMPLAINANT ALLEGES THAT ON TWO OCCASIONS IN 2014, SHE GAVE THE RR MONEY TO INVEST FOR HER, HOWEVER, SHE BELIEVES IT WAS USED INAPPROPRIATELY AND HAS BEEN UNABLE TO RECOVER IT.

In April 2006, in Department of Enforcement v. Bernardo Misseri. Disciplinary Proceeding No. E102003213801, Respondent submitted an Offer of Settlement and consented to the entry of findings and violations that he failed to disclose private securities transactions and an outside business activity in violation of NASD Conduct Rules 2110, 3030 and 3040. Respondent also consented to a two-year all capacities suspension and a $15,000 fine. In April 2006, the Offer of Settlement was accepted by the Office of Disciplinary Affairs.

CAUSE OF ACTION

Willful Failure to Update Form U4

(Article V, Section 2 of FINRA By-Laws, FINRA Rules 1122 and 2010)

Failure to Timely Disclose Tax Liens

2. During the Relevant Period, Respondent failed to disclose four unsatisfied federal tax liens and three unsatisfied state tax warrants (collectively referred to as the "Tax Liens") on his Form U4.

3. At all relevant times, Question 14M of the Form U4 asked, "Do you have any unsatisfied judgments or liens against you?"

4. If a registered representative affirmatively answers Question 14M on his Form U4, then he is required to provide detailed information about each unsatisfied judgment or lien, including the amount and filing date of the judgment or lien. The representative is required to make the disclosure within 30 days of learning ofthe facts that are required to be disclosed.  

New York State Tax Warrants

$37,321 filed on March 2, 2008 (March 28, 2014)

$11,884 filed on June 16, 2014 (June 19, 2015)

$6,746 filed on June 16, 2014 (June 19, 2015)

Internal Revenue Service Tax Liens

$217,256 filed on July 23, 2010 (March 28, 2014)

$14,564 filed on December 3, 2013 (March 28, 2014)

$37,847 filed on October 30, 2014 (June 19, 2015)

$7,662 filed on January 23, 2015 (June 19, 2015)

It is ordered that Respondent be suspended for three months from association with any FINRA member in any capacity and pay a $5,000 fine. The fine shall be due and payable either immediately upon re-association with a member firm, or prior to any application or request for relief from any statutory disqualification resulting from this or any other event or proceeding, whichever is earlier.

SIDE BAR: Although an admonition is typically included in a FINRA AWC about the statutory disqualification impact of a finding of willful non-disclosure, no such admonition appears in the Misseri Order. Unlike the clear and direct statement in the typical AWC boilerplate that "these omissions make me subject to a statutory disqualification," no such language appears in the Misseri Order. As to why such inconsistency exists between two forms of FINRA regulatory settlement is puzzling.

CUSTOMER ALLEGES THAT MR. MISSERI ENGAGED IN UNAUTHORIZED TRANSACTIONS

Disclosed by Legend:

• A FINRA Arbitration Complaint for $50,000 in damages filed February 22, 2016, based upon allegations that:

Statement of Claim Alleges: Unsuitable recommendations, lack of diversification, negligence, breach of fiduciary duty, and breach of contract, violations of: the Iowa Uniform Securities Act, FINRA Rule 2010, FINRA Rule 2150, NYSE Rule 401, and NYSE Rule 405.

The matter was settled on August 12, 2016, for $50,000 and Misseri is noted as having contributed the full amount.

SIDE BAR: If this matter was "settled," why is it not disclosed under the heading of "Customer Dispute - Settled" ?

• A customer complaint for $5,558 in damages received on August 24, 2014, based upon allegations that:

CUSTOMER ALLEGES UNAUTHORIZED TRANSACTIONS RESULTING IN LOSSES IN EXCESS OF THE REPORTING THRESHOLD.

The matter is disclosed as "Closed/No Action" on September 5, 2014.

Disclosed by JP Turner:

• A customer complaint for $15,985.49 in damags received on February 1, 2006,, based on allegations that:

CLIENT ALLEGES UNAUTHORIZED TRADE

The matter is disclosed as "Closed/No Action" on January 29, 2008.

• A customer complaint for $150,000 in damags received on June 3, 2002, based on allegations that:

ACCOUNT RELATED NEGLIGENCES AND FAILUR [sic] TO FOLLOW INSTRUCTIONS

The matter is disclosed as "Closed/No Action" on September 4, 2002.

Disclosed by Legend:

• A FINRA Arbitration Complaint for $150,000 damages served on April 10, 2015, based on allegations that:

CLAIMANT, THROUGH COUNSEL, ALLEGES THAT MR. MISSERI WAS NOT PROPERLY LICENSED IN FLORIDA WHILE CONDUCTING BUSINESS WITH THE CLAIMANT; MADE FALSE STATEMENTS OF MATERIAL FACT; ENGAGED IN UNAUTHORIZED TRANSACTIONS; FAILED TO FOLLOW INSTRUCTIONS; ENGAGED IN CHURNING; ENGAGED IN STOCK MANIPULATION; AND IMPROPERLY UTILIZED MARGIN.

• A $48,487.70 complaint for damages received on October 5, 2014:

CUSTOMER ALLEGES 48,487.70 BOTH REALIZED AND UNREALIZED LOSSES DERIVED FROM INVESTMENT MISMANGEMENT

Disclosed by J.P. Turner & Company LLC:

• A $14,500 complaint for damages received on April 29, 2005:

CLIENT ALLEGES UNAUTHORIZED TRADES IN HIS ACCOUNT

And now we arrive at my point: The AWC should have indicated why it did not deem Greenberg's non-disclosures to rise to the level of "willful." The defense bar and pro se respondents need every bit of insight and every bit of information they can get from the self-regulatory organization when one case goes against the grain in such stunning fashion.

Let me refer you to the thoughts of veteran industry lawyer Alan Wolper, Esq. "Statutorily Disqualified? FINRA Says 'Deal With It'" (Broker Dealer Law Corner, by Alan Wolper, Esq. November 18, 2016):

The problem is, it is difficult to figure out exactly when FINRA will deem a failure to report a tax lien in a timely manner to be willful, and when it will not. I can personally attest that I have had a variety of clients tell essentially the same story to FINRA - I did not know about the lien, or I did not know I had to report the lien - yet come away with widely different outcomes.  On one end of the spectrum, I have had FINRA take no formal action, and choose to content itself by issuing a Cautionary Action letter.  In the middle, I have had FINRA take formal action, but agree the violation was not willful.  Finally, on the other extreme end of the spectrum, FINRA has taken formal action and deemed the violation to be willful. It can be extremely frustrating to make the same argument over the same set of facts, but get different results. 

. . . 

Finally, one more thing about statutory disqualification: FINRA could care less that a finding of willfulness renders a registered representative SD'd.  As the Department of Enforcement recently put it in a brief it filed in one of my cases,

statutory disqualification is not a FINRA sanction; it is a status that flows as a matter of course from predicates enumerated in the Exchange Act. If [Respondent] believes that statutory disqualification is an unduly harsh outcome for willfully violating U4 reporting requirements, he should address his grievances to the SEC and Congress. The SEC and the NAC surely would not want FINRA hearing panels to engage in the equivalent of jury nullification by declining to find willfulness where it has been proved.

What an outrageously callous remark for the staff to make. At least one hearing panel, over a decade ago, had the courage to state the obvious:  "A finding of willfulness, though not an element of the offense under Rule 2110, has serious collateral consequences."  That FINRA staff consciously disregards these consequences, however, potentially career-ending consequences, just blows me away.

Clearly, the existence or non-existence of a statutorily disqualifying event is relevant.  And I know this because the Sanction Guideline for inaccurate U-4 cases includes as one of the Principal Considerations "[w]hether [the] failure resulted in a statutorily disqualified individual becoming or remaining associated with a firm." The fact that whether someone is SD'd or not is expressly pertinent to the determination of the appropriate sanction necessarily means it is not just a material fact, but an important one.  For FINRA simply to pretend it doesn't care that its charging decision will dictate whether or not a respondent gets SD'd, or that such a finding isn't a "sanction," is both short-sighted and unfair.

• FINRA
• AWC
• Offer of Settlement
• Tax Liens
• U4
• Rule 1122
• Nondisclosure
• Willful
• Willfulness
• Willfully
• Statutory Disqualification
• Alan Wolper
• BrokeAndBroker
• Bill Singer