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, David Linderer submitted a Letter of Acceptance, Waiver and Consent (“AWC”), which FINRA accepted. In the Matter of David Linderer, Respondent (AWC 2011029042901, November 6, 2012).
Linderer entered the securities industry in 2000, and was registered with with Genworth Financial Securities Corporation as a General Securities Representative until his August 23, 2011, termination. The AWC asserts that Linderer had no prior relevant disciplinary history.
Between 2004 and 2010, two civil judgments were filed against Linderer by creditors. Also, from November 2005 and May 2011 five tax liens were filed against Linderer. The AWC alleged that Linderer had willfully failed to disclose on hisUniform Application for Securities Industry Registration or Transfer (“Form U4″) the five liens and two judgments, in violation of NASD Rule 2110, IM-1000-1, and FINRA Rules 1122 and 2010.
On Borrowed Time
On May 5, 2011, without Genworth’s prior approval, Linderer borrowed $100,000 from a company owned by one of his clients; and he did not notify the firm of the loan until June 22, 2011. Following the June notification, Genworth reminded Linderer of the pre-approval required by its borrowing policy and requested information/documentation concerning the loan. While Genworth was still reviewing the May loan, on August 4, 2011, Linderer notified the firm that he had just obtained an additional $50,000 loan from his client. The AWC alleged that Linderer’s conduct in connection with accepting the two loans was in violation of FINRA Rules 3240 and 2010.
In accordance with the terms of the AWC, FINRA imposed upon Linderer a 7-month suspension from associating with any member firm in all capacities. No fine was imposed upon Linderer because of his financial status.
At first blush, it looks like Linderer got off lightly — a mere 7-month suspension without a fine. On closer look, however, a veteran regulatory lawyer notices the catch: Linderer was deemed to havewillfully failed to disclose the liens and judgments.
What’s the big deal? Simply stated, a finding of awillful failure to disclose those events transformed Linderer into someone who was not only suspended for seven months but, thereafter, statutorily disqualified — effectively barred absent FINRA’s permission to return to the biz. This is how that admonition is worded in his AWC:
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 makes me subject to a statutory disqualification with respect to association with a member.
If you are found to have willfully (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. Beware of this regulatory speed trap!
For those of you who enjoy a good puzzle, here’s the language from the cited section of the federal securities exchange act:
(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.
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 willfully 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 of Merrill Lynch, Wells Fargo, 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.
For additional information on the issue of “willful” nondisclosure of liens and judgments:
Since the onset of the Great Recession, registered persons have been financially hit along with the rest of the population, and financial pressures have not discriminated among large or small firms. Amidst a souring economy, the loss of commission business, and the closing of firms and branches, whether employed at Merrill Lynch, Morgan Stanley, JP Morgan, Wells Fargo, UBS, or smaller firms, the need for cash pushed many brokers to the limit and prompted arrangements with customers to borrow money. The legacy of those ongoing hard times will likely keep this violation on the front burner at FINRA for years to come. READ the full-text of current FINRA Borrowing Rule:
See these “Street Sweeper” borrowing columns:
FINRA Rule 3240: Borrowing From or Lending to Customers
(a) Permissible Lending Arrangements; Conditions
No person associated with a member in any registered capacity may borrow money from or lend money to any customer of such person unless:
(1) the member has written procedures allowing the borrowing and lending of money between such registered persons and customers of the member;
(2) the borrowing or lending arrangement meets one of the following conditions:
(A) the customer is a member of such person’s immediate family;
(B) the customer (i) is a financial institution regularly engaged in the business of providing credit, financing, or loans, or other entity or person that regularly arranges or extends credit in the ordinary course of business and (ii) is acting in the course of such business;
(C) the customer and the registered person are both registered persons of the same member;
(D) the lending arrangement is based on a personal relationship with the customer, such that the loan would not have been solicited, offered, or given had the customer and the registered person not maintained a relationship outside of the broker-customer relationship; or
(E) the lending arrangement is based on a business relationship outside of the broker-customer relationship; and
(3) the requirements of paragraph (b) of this Rule are satisfied.
(b) Notification and Approval
(1) The registered person shall notify the member of the borrowing or lending arrangements described in paragraphs (a)(2)(C), (D), and (E) above prior to entering into such arrangements and the member shall pre-approve in writing such arrangements. The registered person shall also notify the member and the member shall pre-approve in writing any modifications to such arrangements, including any extension of the duration of such arrangements.
(2) With respect to the borrowing or lending arrangements described in paragraph (a)(2)(A) above, a member’s written procedures may indicate that registered persons are not required to notify the member or receive member approval either prior to or subsequent to entering into such borrowing or lending arrangements.
(3) With respect to the borrowing or lending arrangements described in paragraph (a)(2)(B) above, a member’s written procedures may indicate that registered persons are not required to notify the member or receive member approval either prior to or subsequent to entering into such borrowing or lending arrangements, provided that, the loan has been made on commercial terms that the customer generally makes available to members of the general public similarly situated as to need, purpose and creditworthiness. For purposes of this subparagraph, the member may rely on the registered person’s representation that the terms of the loan meet the above-described standards.
(c) Definition of Immediate Family
The term “immediate family” means parents, grandparents, mother-in-law or father-in-law, husband or wife, brother or sister, brother-in-law or sister-in-law, son-in law or daughter-in-law, children, grandchildren, cousin, aunt or uncle, or niece or nephew, and any other person whom the registered person supports, directly or indirectly, to a material extent.
.01 Record Retention. For purposes of paragraph (b)(1) of this Rule, members shall preserve the written pre-approval for at least three years after the date that the borrowing or lending arrangement has terminated or for at least three years after the registered person’s association with the member has terminated.