by Bill Singer
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, Stuart Funke submitted a Letter of Acceptance, Waiver and Consent (“AWC”), which FINRA accepted. In the Matter of Stuart Funke, Respondent (AWC 2010024504601, July 13, 2012).
Funke entered the securities industry in 1990, and was associated with several firms. The AWC asserts that Funke has no prior disciplinary history with FINRA.
Promises Promises
Bill Singer
Without informing his member firm or obtaining its prior approval, in September 2005, Funke solicited two individuals to loan to him and his brother $500,000 in return for a promissory note (the “2005 Note”), which offered a six-month maturity and paid 14% interest.
The two individuals sued Funke for $535,000 in damages in state court in March 2006, after he failed to repay the 2005 Note within the original six-month term. Funke settled with the plaintiffs in January 2007 for the lump sum of $220,000 plus another promissory note for $120,000.
In February 2010, Funke filed for Chapter 7 bankruptcy.
Time’s Up
The AWC alleged that Funke willfully failed to amend his Form U4 within thirty days to reflect:
- The civil litigation in violation of Article V, Section 2(c) of NASD’s By-Laws and NASD Rules 2110 and IM-1000-1;
- The settlement of the civil in violation of Article V, Section 2(c) of NASD’s By-Laws and NASD Rules 2110 and IM-1000-1; and
- his bankruptcy filing, in violation of Article V, Section 2(c) of FINRA’s By-Laws and FINRA Rules 1122: Filing of Misleading Information as to Membership or Registration and 2010: Standards of Commercial Honor and Principles of Trade
In accordance with the terms of the AWC, FINRA imposed upon Funke a 15-month suspension from association with all FINRA members in all capacities. The AWC does not impose a fine but notes that because Funke was granted a bankruptcy discharge on May 19, 2010, no monetary sanction was assessed in this matter.
Note that the AWC includes this acknowledgement:
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.
Bill Singer‘s Comment
Beware of the regulatory speed trap that exists for those who do not timely disclose reportable events. If you are found to have wilfully (intentionally) failed to timely disclose a material fact as required on the Form U4, that conduct can expose you to a statutory disqualification. As such, you wind up with the oddball outcome in which you could have a modest fine and suspension imposed upon you by FINRA but when you attempt to return to work, you learn that your willful misconduct rendered you a statutorily disqualified individual.
Some pro se regulatory respondents and more than a few inexperienced lawyers often find themselves in negotiations with FINRA staff where, for example, a failure to timely disclose a material event on a Form U4 could have prompted an initial settlement offer from the regulator of, hypothetically, a 1 year suspension and a $20,000 fine. After some grueling negotiations, FINRA may agree to 30 days and $5,000. Wow — you’re really, really thrilled. What is missed is that the AWC states that you wilfully failed to amend your Form U4. So what, you think: I’m only going to sit down for 30 days and pay a lousy $5,000, all of which I can make up. Think again. When your 30 days are up, you’re going to get a nasty surprise because you are now statutorily disqualified.
I call this issues a regulatory speed trap because it continues to trip up the unwary. During my career, many industry registered persons have contacted me concerning this very issue. More often than not, a former employee ofMerrill Lynch, Smith Barney, Morgan Stanley, JP Morgan, UBS, or any other number of large and small firms feels that they were sandbagged. And this anger is not solely directed at FINRA staff but also at the former lawyer.
In many cases, there is a sense that FINRA sucker punched the registered rep by “slipping in” to an AWC or Offer of Settlement seemingly innocuous language about “willful” failure. Time and time again I have heard complaints from folks who became statutorily disqualified that they never, ever thought that by settling with FINRA that they had so destroyed their careers. A simple and fair solution to this ongoing issue would be for FINRA to mandate that its staff provide a one page, boldfaced notice attendant to all “willful” settlements that the registered person affirms that by signing the AWC or Offer of Settlement that the finding of willful misconduct constitutes a statutory disqualification.
In addition to complaints against FINRA staff, those who feel that they entered into settlements without understanding that they had consented to being deemed statutorily disqualified also rage against their in-house legal counsel and independent outside counsel for failing to inform them of this situation. Sometimes I have to recommend that the registered person consult with a legal malpractice lawyer because it is apparent that they were inadequately counseled about this nasty wrinkle — and in some cases it turns out that the lawyer was unfamiliar with this statutory disqualification issue. All of which explains why I regularly publish these cases so as to better inform the industry of these issues.