An irreverent Wall Street Blog
Crash and Burn Upon Entry Into Wall Street
April 6, 2018
Most of us run into some problems during our lifetimes. For some of us, the resolution of such issues may be to pay a fine or sit down for a suspension or promise never to do something again. In some cases, our problems involve dealing with a government agency and the sanctions that they hand down may be so severe as to amount to the ending of a career -- which often prompts folks to seek work elsewhere and try to start over. In a recent FINRA disciplinary settlement, we come across the tale of a former escrow agent who wound up getting fined and barred by two different states in 2013 and 2014 respectively. Perhaps trying to start anew, this individual attempted a new career in the securities industry. Sometimes you can run from your past. Sometimes you can't. Today's BrokeAndBroker.com Blog examines the latter variation. Another story of crash and burn on Wall Street.
Case In Point
The AWC asserts that Hinson was registered
with FINRA as a Private Securities Offering Representative through an
association with Wealthforge Securities, LLC (BD No. 152550). Under the AWC's
heading of "Relevant Disciplinary History," are the following disclosures:
Hinson has no relevant disciplinary history in the securities industry.In February 2013, the Washington State Department of Financial Institutions suspended Hinson from serving as an escrow agent in Washington for five years and fined him $25,000 (the "Washington Discipline"). Hinson was disciplined for performing escrow services without appropriate licensure.In August 2014, the California Department of Business Oversight (the "California DBO") barred Hinson in California from any position of employment, management or control of any escrow agent (the "California Discipline"). Hinson was disciplined for, among other statutory infractions, making fund transfers between his escrow company's trust account and its operating account. The California DBO regulates escrow agents, and also broker-dealers, banks, and credit unions.
The Rulebook
Section 3(a)(39) of the Securities Exchange Act provides [Ed: highlighting added]:
(39) A person is 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.
Statutory Disqualification for Willful Non-Disclosure
In affirming a "willful" non-disclosure finding by FINRA, the Securities and Exchanged 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.
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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 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.
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.
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 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.
If you do not opt to settle and demand your day in court, a FINRA OHO Decision may state the following:
FINRA Rule 1122: Filing
of Misleading Information as to Membership or Registration,
provides:
For willfully failing to timely update his 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.
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 under 14D the following:
(1) Has any other Federal regulatory agency or any state regulatory agency or foreign financial regulatory authority ever:
(a) found you to have made a false statement or omission or been dishonest, unfair or unethical?(b) found you to have been involved in a violation of investment-related regulation(s) or statute(s)?(c) found you to have been a cause of an investment-related business having its authorization to do business denied, suspended, revoked or restricted?(d) entered an order against you in connection with an investment-related activity?(e) denied, suspended, or revoked your registration or license or otherwise, by order, prevented you from associating with an investment-related business or restricted your activities?
(2) Have you been subject to any final order of a state securities commission (or any agency or office performing like functions), state authority that supervises or examines banks, savings associations, or credit unions, state insurance commission (or any agency or office performing like functions), an appropriate federal banking agency, or the National Credit Union Administration, that:
(a) bars you from association with an entity regulated by such commission, authority, agency, or officer, or from engaging in the business of securities, insurance, banking, savings association activities, or credit union activities; or(b) constitutes a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct?
FINRA's Allegations
The AWC alleges that in May 2016, when Hinson
filed his initial Form U4, he failed to disclose the February 2013 Washington Discipline or the August 2014 California Discipline in response to any of the appropriate
disclosure questions. Further, the AWC alleges that at no time when he was
registered with FINRA did Hinson amend his Form U4 to disclose the two
referenced disciplinary matters.
Form U5
The AWC asserts that on June 16, 2017, Wealthforge
filed a Uniform Termination Notice for Securities Industry Registration
("Form U5") stating that Hinson had been discharged effective June
15, 2017 for failing to disclose material elements on his Uniform Application
for Securities Industry Registration ("Form U4").
Sanctions
FINRA deemed that Hinson's cited conduct
constituted willful failure to disclose on his Form U4 two state regulatory
actions against him. As a result, FINRA asserted that he violated Article V, Section 2(c) of the
FINRA By-Laws, and FINRA Rules 1122 and 2010.
The AWC states that "On July 6, 2016, Hinson was granted a discharge in bankruptcy under Section 727 of Title 11, United States Code. Accordingly, no monetary sanction is being assessed in this matter.
In accordance with the terms of the AWC, FINRA imposed upon Hinson a five-month suspension from from associating with any FINRA member firm in any capacity. The AWC includes this statement:
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.