October 24, 2013
C'mon now -- be honest -- you've probably written a check at a time when you didn't quite have the bucks in your account, but, ahem, there was that deposit you were expecting to come in tomorrow, or maybe the day after. Of course, there may also have been that time when you deposited a check from a third-party into your account and, omigod, the damn thing bounced and you had already written a check against the funds that you thought were going to be there. What's all this got to do with FINRA? Look, up in the sky, it's a bird, it's a plane, no . . . it's a kite with a tail of lousy checks attached to it.
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, Steven Keith Cates submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Steven Keith Cates, Respondent (AWC 2012033210801, October 1, 2013).
Cates entered the securities industry 1987 during the times relevant to this AWC was registered with SunTrust Investment Services, Inc. The AWC asserts that Cates had no prior disciplinary history in the securities industry.
Between January 1, 2012, and June 30, 2012, Cates allegedly cashed 11 checks and deposited two checks in amounts ranging between $100 and $2,000 against his personal bank checking account. The 13 checks, totaling $8,545.28, were drawn against his money market account at another financial institution. The AWC asserts that Cates used the money market checks to either obtain cash or to cover debited expenses against his personal bank checking account until his paycheck was credited to the personal bank checking account.
So far, no big deal -- or so it would seem; however the AWC asserts that the 13 checks were returned for insufficient funds because the money market account never had a balance higher than $.91. Moreover, the AWC alleges that, in fact, Cates contemporaneously knew there were insufficient funds in his money market account when he was engaged in cashing and deposit the subject checks -- and essentially obtaining an unauthorized "loan" from the bank. Consequently, FINRA asserted that Cates had engaged in "check kiting" in violation of FINRA Rule 2010.
Separately, the AWC alleges that on March 8, 2010, Cates entered into a compromise with a creditor bank to settle a debt of $23,000 by paying $3,381.02; however, he first disclosed that event in March 2011 but he did not amend his Uniform Application For Securities Industry Registration Or Transfer ("Form U4") until July 5, 2011. Cates' untimely disclosure prompted SunTrust to issue a "Letter of Education" on August 31, 2011, reminding Cates of his responsibility to maintain current Form U4 information and to file changes and amendments within 30 days.
On September 29, 2011 (about one month after being issued the Letter of Education0, Cates again entered into a compromise with a creditor bank to settle a debt of $27,906.83 for $5,358.94. In fact, a few weeks later on October 15, 2011, Cates entered into another compromise with another creditor to settle a $1,200 debt for $400. Thereafter, on January 17, 2012, Cates entered into another compromise to settle a debt of $6,096.39 for $1,870.51. The AWC asserts that Cates did not disclose these three compromises to his FINRA member firm until March 2012. Further, an amended Form U4 was not filed until April 19, 2012.
Ticking Clock of Disclosure
Article V of FINRA's By-Laws: Registered Representatives and Associated Person, provides as follows:
Application for Registration
Sec. 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.
In addition to the above By-Law provision, FINRA also requires the observance of this rule:
FINRA Rule 1122. Filing of Misleading Information as to Membership or Registration
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 the following:
14K. 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?
According to online FINRA documents as of October 24, 2013, SuntTrust "Discharged" Cates on June 29, 2012, based upon allegations that he had been:
TERMINATED FOR MISUSE OF HIS PERSONAL BANK ACCOUNT; NO SECURITIES CLIENT WAS INVOLVED
In reviewing the circumstances of Cates' compromises with creditors and his untimely notices thereof, FINRA asserted that his failures to timely report were willful in light of the admonition in the August 31, 2011, ''Letter of Education" and constituted violations of Article V, Section 2 of FINRA's By-Laws and FINRA Rule 2010.
In accordance with the terms of the AWC, FINRA imposed upon Cates a $7,500 fine and a six-month suspension from association with any member of FINRA.
Bill Singer's Comment
What's the big deal with the willful language? Simply stated, a finding of a willful failure to disclose transformed Cates into someone who was not only suspended for six months and fined $7,500 but, thereafter, statutorily disqualified - effectively barred absent FINRA's permission to return to the biz. This is how that admonition is worded in Cate's 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)(9)(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.
The finding of willful (intentional) failure to timely disclose a material fact as required on the Form U4 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.
When your 30 days are up, you're going to get a nasty surprise because you are now statutorily disqualified.
I call this issue 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 - complaining 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 for a few months of suspension that they had destroyed their careers. Commendably, FINRA is now including in AWCs the above cited explanation of the consequences of entering into "willful" settlements. Before you sign on the dotted line, read the admonition and make sure that you understand the implication.
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.