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FINRA Says It Looked And Quacked Like A Felony And Must Be Disclosed
Written: May 9, 2012

Male mallard duck Français : Canard colvert male

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, Jeffrey Pulaski submitted a Letter of Acceptance, Waiver and Consent (“AWC”), which FINRA accepted. In the Matter of Jeffrey Pulaski, Respondent (AWC 20110295388, May 4, 2012).

Background

Pulaski entered the securities industry in May 2007 and during the relevant period of June 2008 through his voluntary resignation on September 20, 2011, he was employed as a registered representative with PNC Investments, Inc.  According to the AWC, Pulaski has no prior relevant disciplinary history.

Brushes With The Law

According to the AWC, around  July 20, 2010, Pulaski was charged with four criminal counts of the New Jersey Statutes Annotated (“NJSA”):

  • Unlawful Possession of a Weapon in the 4th Degree (NJSA 2C: 29-5D);
  • Unlawful Purpose-Firearms in the 2nd Degree (NJSA 2C: 39-4A);
  • Criminal Mischief in the 4t h Degree (NJSA 2C: 17-3B(1)); and
  • Weapon Possession Knives-Clubs in the 4th Degree (NJSA 2C: 39-3E).

On December 21, 2011, the Court ordered that the charges be dismissed after Pulaski successfully completed the conditions of the Pre-Trial Intervention (“PTI”) Program, which included 50 hours of community service during a one year probationary period.

Is It A Duck or A Goose?

Most states’ penal codes catergorize crimes as felonies or misdemeanors but New Jersey opted for “indictable,” “disorderly persons,” or “petty disorderly persons.” As such, NJ criminal procedure does not reference crimes as felonies or misdemeanors.  In NJ, indictable offenses are broken down among 1st, 2nd, 3rd and 4th degrees, which expose the defendant to more than 6 months of incarceration; non-indictable offenses (thedisorderly and petty disorderly persons) are for less than 6 months. Unlike indictable offenses, the lesser charges are not presented to a grand jury and do not require trial by jury.

SIDE BAR:  The Definition guidelines for the Uniform Application for Securities Industry Registration or Transfer (“Form U4″) provide for the term “Felony”:

For jurisdictions that do not differentiate between a felony or misdemeanor, is an offense punishable by a sentence of at least one year imprisonment and/or a fine of at least $1,000. The term also includes a general court martial.

Pulaski’s AWC notes that:

Pursuant to the general instructions of the Form U4, all four violations would be considered felonies since they are each punishable by a sentence of at least one year imprisonment.

Better Late: Not Always

During Pulaski’s employment, PNC required employees to notify its compliance department if they became subject to an arrest, indictment, arraignment, conviction, or plead guilty or no contest to any felony or misdemeanor, other than misdemeanor traffic offenses. In December 2010, Pulaski electronically completed the firm’s Annual Compliance Letter, answering “Yes” to the following question:

Do you understand and acknowledge that failure to comply with any of the policies of the PNC Financial Services Group, Inc. and its affiliates, including, but not limited to, those contained in the Compliance Manual or Written Supervisory Procedures, or any state or federal securities, insurance, or banking laws, may subject you to disciplinary action including possible termination?

Despite Pulaski’s attestation, he did not disclose to PNC his July 2010 felonies until July 2011.  On August 1, 2011, Pulaski updated his Form U4 to reflect a “Yes” response to Question 14A(l)(b):

Have you ever been charged with any felony.

Notwithstanding his tardy notice, Pulaski listed each of the four charges and categorized them as felonies; and he further disclosed that he was participating in the PTI Program.

FINRA Sanctions

FINRA alleged that Pulaski failed to promptly update his Form U4 to disclose the four “felony charges,” in violation of FINRA Rule 2010, FINRA By-Laws, Article V Section 2(c) and FINRA Rule 1122. In accordance with the AWC, FINRA imposed a $5,000 fine and 30-day  suspension from association with a FINRA member in any capacity.

Bill Singer’s Comment

Under all the attendant circumstances, a fair resolution of the allegations — not an exorbitant fine or suspension given the nature of the charges. It often surprises Wall Street outsiders to learn that these criminal disclosure issues are a common occurrence and an event that trips up many registered persons.  With the onset of the Great Recession, many industry folks experienced the same financial, professional, and personal stresses that the rest of the country endured.  Those pressures sometimes resulted in folks driving while under the influence of drugs or alcohol — and repeat infractions of those laws typically escalate the most recent charge into a felony.  Similarly, financial pressures increased incidents of fraud, embezzlement, and theft.  Moreover, this is not merely a situation that hit the fringe of the industry at boiler-rooms and penny-stock pumpers but also percolated to the very top of the business — Goldman Sachs, Merrill Lynch, Wells Fargo, UBS, Morgan Stanley, JP Morgan, you name ‘em, they have employees with criminal events.

For registered persons, a number of valuable takeaways.

  • If you are “charged” with a crime, reference your Form U4 and determine whether that circumstance requires disclosure.  It is typically best to seek guidance from your criminal lawyer on this issue but be aware that many such practitioners are often unfamiliar with the unique disclosure obligations of the securities industry. The Definitions guidance for the Form U4 offers this definition: 
“Charged: Means being accused of a crime in a formal complaint, information, or indictment (or equivalent formal charge).”
  • If you are merely arrested, your employer may have far more extensive reporting obligations than those of federal, state, or self-regulatory regulators.  Be careful to differentiate between what you are required to disclose on a form that is filed with a regulator and a form submitted solely to your firm’s compliance/legal departments. In Pulaski’s case, for example, his employer required disclosure of a mere “arrest” (which is a lesser event than a “charge”). An arrest without a charge is not a disclosable matter on the Form U4.
  • The failure to timely disclose a criminal event typically cascades because most Wall Street employers require the execution of an annual compliance questionnaire, which typically asks whether you were charged or convicted of a crime during the prior 12 months.  A misstatement on that document will only add to your problems.
  • Finally, your career may be in the balance if FINRA alleges that your failure to disclose was willful: such a finding would deem you statutorily disqualified.  Pulaski likely helped himself out by making a full disclosure of his situation albeit late — and the oddball nature of New Jersey’s penal code may have also weighed in his favor.

 
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