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Child Endangerment Defendant Barred By FINRA
September 28, 2017
At the heart of Wall Street regulation is the inescapable fact that we are dealing with human beings. To read through the Financial Industry Regulatory Authority's disciplinary docket is to experience a spectrum of idiocy that runs from seemingly inadvertent goofs to detestable acts that cause inestimable harm. When observing the tawdry human pageant reported by FINRA, we often come upon cases where we applaud the regulator's actions and sanctions but, nonetheless, are saddened by the circumstances of a Respondent who is clearly struggling with life, stumbling, and making bad choices. We can't always know what prompts misconduct. We can't always understand or appreciate the stress that sets some folks down the wrong path. That being said, our first concern must always be for the victims. A recent FINRA disciplinary settlement highlights many of these factors.
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, Tiffany De Ruosi submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Tiffany De Ruosi, Respondent (AWC 2015046161601, September 15, 2017)
The AWC assets that De Ruosi entered the industry in 1992, and from June 2007 until September 2016 was registered with FINRA member firm Centaurus Financial, Inc. The AWC asserts that:
In 2008, the California Department of lnsurance imposed a restricted license on De Ruosi due to her prior misdemeanor convictions. In 2013, this restriction was removed.In 2016, the California Department of Insurance revoked De Ruosi's license and stated "there is a demonstrated present or potential unfitness to perform the functions of an insurance licensee" based on her misdemeanor convictions.
Form U4
The AWC asserts that De Ruosi willfully failed to timely amend her Uniform Application for Securities Industry Registration or Transfer ("Form U4") to disclose a felony charge in connection with a motor vehicle incident that occurred in August 2014.
The AWC further asserts that on September 18, 2014, De Ruosi was charged with felony child endangerment by a caretaker. This child-endangerment felony charge was reduced in March 2015 to a misdemeanor, to which De Ruosi pled guilty.
The Rulebook
Taking Respondent De Ruosi's fact pattern into consideration, let's start meandering through some industry rules and regulations. I'm trying to avoid only presenting the pertinent language in a given rule so that readers will better understand the enormity of what's on the books and the complexity of each and every section, subsection, and sub-sub section:
Article V of FINRA's By-Laws: Registered Representatives and Associated Persons, provides:
Application for RegistrationSec. 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.
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.
The Uniform Application for Securities Industry Registration or Transfer ("Form U4") provides:
Question 14A(1)(b): "Have you ever been charged with any felony?"
FINRA Rule 2010: Standards of Commercial Honor and Principles of Trade provides:
A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.
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.
Section 3(a)(39) of the Securities Exchange Act provides:
(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-(A) has been and is expelled or suspended from membership or participation in, or barred or suspended from being associated with a member of, any self-regulatory organization, foreign equivalent of a self-regulatory organization, foreign or international securities exchange, contract market designated pursuant to section 5 of the Commodity Exchange Act (7 U.S.C. 7), or any substantially equivalent foreign statute or regulation, or futures association registered under section 17 of such Act (7 U.S.C. 21), or any substantially equivalent foreign statute or regulation, or has been and is denied trading privileges on any such contract market or foreign equivalent;(B) [12] is subject to-(i) an order of the Commission, other appropriate regulatory agency, or foreign financial regulatory authority-
(I) denying, suspending for a period not exceeding 12 months, or revoking his registration as a broker, dealer, municipal securities dealer, government securities broker, government securities dealer, security-based swap dealer, or major security-based swap participant or limiting his activities as a foreign person performing a function substantially equivalent to any of the above; or(II) barring or suspending for a period not exceeding 12 months his being associated with a broker, dealer, municipal securities dealer, security-based swap dealer, major security-based swap participant, government securities broker, government securities dealer, or foreign person performing a function substantially equivalent to any of the above;
(ii) an order of the Commodity Futures Trading Commission denying, suspending, or revoking his registration under the Commodity Exchange Act (7 U.S.C. 1 et seq.); or (iii) an order by a foreign financial regulatory authority denying, suspending, or revoking the person's authority to engage in transactions in contracts of sale of a commodity for future delivery or other instruments traded on or subject to the rules of a contract market, board of trade, or foreign equivalent thereof;(C) by his conduct while associated with a broker, dealer, municipal securities dealer, government securities broker, government securities dealer, security-based swap dealer, or major security-based swap participant, or while associated with an entity or person required to be registered under the Commodity Exchange Act, has been found to be a cause of any effective suspension, expulsion, or order of the character described in subparagraph (A) or (B) of this paragraph, and in entering such a suspension, expulsion, or order, the Commission, an appropriate regulatory agency, or any such self-regulatory organization shall have jurisdiction to find whether or not any person was a cause thereof;(D) by his conduct while associated with any broker, dealer, municipal securities dealer, government securities broker, government securities dealer, security-based swap dealer, major security-based swap participant, or any other entity engaged in transactions in securities, or while associated with an entity engaged in transactions in contracts of sale of a commodity for future delivery or other instruments traded on or subject to the rules of a contract market, board of trade, or foreign equivalent thereof, has been found to be a cause of any effective suspension, expulsion, or order by a foreign or international securities exchange or foreign financial regulatory authority empowered by a foreign government to administer or enforce its laws relating to financial transactions as described in subparagraph (A) or (B) of this paragraph;(E) has associated with him any person who is known, or in the exercise of reasonable care should be known, to him to be a person described by subparagraph (A), (B), (C), or (D) of this paragraph; or(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.
Statutory Disqualification for Willful Non-Disclosure
Under Section 3(a)(39) of the Exchange Act, in pertinent part, statutory disqualification attaches if:
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."
The Securities and Exchange Commission ("SEC") affirmed a "willful" non-disclosure finding by FINRA, 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). In defining what constitutes "willful," the McCune SEC Opinion asserts that:
[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)).
If you opt to settle a finding by FINRA that you were guilty of willful nondisclosure, the self-regulator's Letter of Acceptance, Waiver and Consent settlement typically contains the following admonition:
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.
De Ruosi's Violations
The AWC asserts that as a result her September 2014 Felony charge, De Ruosi was required to provide an affirmative response and explanation to Form U4's Disclosure Question 14(A)(1)(b) and to do so with 30-days of said charge. FINRA asserts that De Ruosi did not amend her Form U4 to reflect the felony charge until June 25, 2015, in violation of Article V, Section 2(c) of the FINRA By-Laws and FINRA Rules 1122 and 2010.
Additionally, the AWC asserts that in October 2014, De Ruosi completed Centaurus' annual compliance questionnaire (the "ACQ") and falsely answered *'no" to the question that asked if she had been arrested, charged and arraigned for any criminal offense since her last submission to the firm, which constituted a violation of FINRA Rule 2010.
Sanctions
In accordance with the terms of the AWC, FINRA imposed upon De Ruosi a $5,000 fine and a six-month suspension from associating with any FINRA member in any capacity. De Ruosi's AWC includes this paragraph:
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 Ill, Section 4 of FINRA 's By-Laws, this omission makes me subject to a statutory disqualification with respect to association with a member.
Bill Singer's Comment
Criminal Priors
By way of providing further content and context to the criminal case against De Rousi, online FINRA BrokerCheck records under the heading "Criminal -- Final Disposition" as of September 28, 2017, disclose that she was charged on August 27, 2014, with the Felony of "Child Endangerment by Caretaker," which was reduced on March 23, 2015, to a misdemeanor to which she pleaded guilty. The misdemeanor appears to be "Driving when blood alcohol .08% or more with two priors." De Rousi was fined $555 and "ordered to serve 365 days -- start date to be 7/31/2015 to about 5/29/2016. She has credit for 36 days and will have the ability for reduced time."
Also, De Rousi's BrokerCheck records disclose that she was charged on May 24, 2007, with one Felony count of Child Endangerment, to which she pleaded Not Guilty and the charges were dismissed on April 25, 2008.
Regulation in Silos?
This statement in De Ruosi's 2017 FINRA AWC truly perplexes me:
De Ruosi's insurance license was revoked by California in 2016 but FINRA took until September 2017 to bar her?In 2016, the California Department of Insurance revoked De Ruosi's license and stated "there is a demonstrated present or potential unfitness to perform the functions of an insurance licensee" based on her misdemeanor convictions.
Do the various financial services regulators communicate with each other? Is there any effort by insurance regulators to notify stockbroker regulators and investment adviser regulators and banking regulators of any charges/settlements/findings involving individuals with overlapping jurisdiction? Is there any effort to coordinate among these regulators?
Given that FINRA assigned a 2015- prefix to De Ruosi's AWC, I will infer that, at the very latest, the self-regulator had begun its investigation of her about two years ago. To be blunt, what the hell took so long -- I mean, c'mon, the only issue here was that she did NOT timely disclose her August 2014 felony charge until June 2015 (and lied on an ACQ). It's not like those facts required months of investigation. It's pretty much a matter of public record. Also, FINRA was on notice in 2016 that the California Department of Insurance had revoked her insurance license.
Customer Disputes
Solely by way of background and offering further content and context, De Ruousi's online FINRA BrokerCheck file as of September 28, 2017, discloses two items under the heading "Customer Distpute -- Settled." and 26 items under the heading "Customer Dispute - Closed-No Action / Withdrawn / Dismissed / Denied"
The 26 closed/withdrawn/dismissed/denied matters involve one complaint received in 2013 and closed that year; and 25 complaints that evolved into a 2005 civil lawsuit involving variable annuities
In 2007, A. G. Edwards & Sons, Inc. reported the settlement of an NASD Arbitration for $1,136,698.00 involving allegations of breach of fiduciary duty, fraudulent and negligent misrepresentation, and negligence involving variable annuities. This settlement appears to include some of the customers cited in the 26 closed/etc. matters.
In 2004, A. G. Edwards & Sons, Inc. reported the settlement of a 2003 NASD Arbitration for $50,000 versus alleged damages of $72,821.00 involving, in part, allegations of negligence and suitability.