An irreverent Wall Street Blog
Bill Singer's Annual Warning: Disclose Your Tax Liens
March 4, 2020
Sometimes a registered representative's non-disclosure of a tax lien is inadvertent: You didn't know that one had been filed. Sometimes the rep believed that a tax dispute had been resolved and no lien was issued -- or his CPA gave the impression that the lien had been recalled, cancelled, or something along the lines that what was, isn't, and, as such, fuggedaboutit. Whatever the explanation or excuse, during some four decades practicing law on Wall Street, I've likely hear 'em all. In a small percentage of "I didn't know about the lien" cases, the rep is truly the unfortunate victim of a bona fide misunderstanding; however, more often than not, the rep intentionally embarked upon a course of non-disclosure out of embarrassment or out of fear that a disclosure would prompt a termination. Consequently, yet again, here is my annual offering about the dire consequences of willfully failing to disclose tax liens.
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, Kenton C. Crabb submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Kenton C. Crabb, Respondent (FINRA AWC 2018059489001)
https://www.finra.org/sites/default/files/fda_documents/2018059489001%20Kenton%20C.%20Crabb%20CRD%202397338%20AWC%20va.pdf
The AWC alleges that Kenton C. Crabb was first registered in 1993 and by March 2001, he was registered with FINRA member firm Destiny Capital Securities Corporation, where he remained until his November 16, 2018, voluntary termination.The AWC alleges that Crabb "does not have any disciplinary history with the SEC, any state securities regulators, FINRA, or any other self-regulatory organization."
As alleged in part in the FINRA AWC, during the relevant period between January 2010 and November 2018:
[T]he IRS filed seven tax liens against Crabb, and the State of Ohio filed four tax liens against Crabb. At filing, these 11 liens had a total value of approximately $1.7 million. Despite receiving notice of each lien, Crabb willfully failed to disclose the liens on his Form U4 within 30 days after learning of each lien's existence. He disclosed one federal lien approximately seven years after learning of the lien's existence, one federal lien and three state liens approximately two years after learning of the liens' existence, and two federal liens approximately one year after learning of the liens' existence. For three federal liens and one state lien, totaling more than $1.1 million, Crabb failed to make any disclosure at all.With respect to three of the liens that he untimely disclosed, Crabb represented on his Form U4 that the liens were satisfied when they were not. Because he inaccurately represented that the liens had been satisfied, the liens did not appear on Crabb's public-facing BrokerCheck profile. On six occasions during the Relevant Period, Crabb also falsely attested on his Firm's annual compliance questionnaires that he did not have any unsatisfied judgments or liens.
The Rulebook
The Uniform Application for Securities Industry Registration or Transfer (the "Form U4") asks in part [Ed: emphasis added]:
Financial Disclosure14K. 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?
Article V of FINRA's By-Laws states in part [Ed: highlights added]:
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.
FINRA Sanctions
In accordance with the terms of the AWC, FINRA found that Crabb had willfully violated FINRA By-Laws Article V, Section 2(c)and FINRA Rules 1122 and 2010; and the self regulator imposed upon him a $5,000 fine and a six-month suspension from associating iwth any FINRA member firm in any capacity. As set forth in the FINRA AWC:
Respondent understands that this settlement includes a finding that he willfully omitted to state material facts and willfully misrepresented 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, the omission and misrepresentation makes him subject to a statutory disqualification with respect to association with a member.
Statutory Disqualification
Section 3(a)(39) of the Securities Exchange Act provides [Ed: highlighting added]:
(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.
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 facts on a Form , 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:
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 TIME] and fined [INSERT AMOUNT]. Because his misconduct was willful, and the information he failed to disclose was material, he is subject to statutory disqualification.
Bill Singer's Comment:
The overwhelming majority of AWCs settling allegations of undisclosed tax liens tend to involve findings of willful non-disclosure -- which results in a statutory disqualification. Given that non-disclosed/untimely-disclosed tax lien cases often involve an individual in financial straits, such respondents typically lack the funds to retain a lawyer and, as such, they represent themselves pro se during FINRA's investigation, settlement negotiations, and, if needed, hearings and appeals. In Crabb's case, the AWC discloses that he was represented by legal counsel
In a tax-lien-non-disclosure matter, FINRA Staff's initial settlement offer may involve a large amount of dollars for a fine and a frightening number of years or months for a suspension (or a Bar). For example, Staff could ask for $25,000 in fines and an 18 month suspension. It's the stuff designed to scare an individual into quickly settling. In response to an initial offer, a pro se stockbroker may panic and beg and plead for some compassion from Staff. After the passage of some time, Staff might come back and propose a $5,000 fine and a 30-day suspension. The rep may be elated and quickly accepts the offer. Wow -- I sure as hell didn't need to spend the bucks on some veteran industry defense lawyer. I can pay that fine. I can do 30 days standing on my head. Alas, on the AWC, under the line for the representative's signature, would be this gem:
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.
Many reps who navigate the AWC process, do so without legal counsel, and, as a result, those unrepresented respondents don't understand that after they paid the $5,000 fine and served the 30-day suspension that they are, in effect, barred from the industry as statutorily disqualified for having "willfully omitted to state a material fact on a Form U4." Is it a shock and surprise? For many pro se respondents, it's devastating. Oh, sure, that whole "I understand" language was printed in the AWC along with the reference to Section 3(a)(39)(F) and the admonition that "this omission makes me subject to a statutory disqualification." The thing is, many non-lawyers representing themselves didn't understand that after the 30 days of suspension are served, that they are disqualified from returning to their jobs. Many of those pro se folks think that the 30 days sort of negates the whole disqualification thing. Think again!
"UPDATE: 11Cir Sustains SEC And FINRA On Willful Failure To Disclose Tax Liens" (BrokeAndBroker.com Blog / September 21, 2018)
http://www.brokeandbroker.com/4198/elgart-tax-liens/
http://www.brokeandbroker.com/4198/elgart-tax-liens/
http://brokeandbroker.com/PDF/WillfulSD.pdf
Visit the BrokeAndBroker.com Blog "Willfulness" Archive
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