Troubled History Of Liens And Bankruptcies Disqualifies Stockbroker

May 2, 2014

Michael Earl McCune earned a Juris Doctor degree in 1986 but does not presently practice law or is not admitted to any state bar.  As a student, he worked as a trust officer at a bank and then reviewed tax returns for six months at the Internal Revenue Service. In 1987 he entered the securities industry, where, he served at times as a branch office manager. From December 1996 until May 2011, he was registered with FINRA member Royal Alliance Associates, Inc.  How does an individual with such an impressive background run afoul of the Financial Industry Regulatory Authority ("FINRA")?  Well, frankly, that's quite a story.

Troubled Financial History

In FINRA Department of Enforcement, Complainant, vs. Michael Earl McCune, Respondent (FINRA Office of Hearing Officers ("OHO")  Panel Decision, No. 2011027993301, April 23, 2014). we learn these facts from the opening paragraphs of the Decision (footnotes omitted):

Respondent Michael Earl McCune has a troubled financial history, marked by filings of bankruptcies and tax liens. As a registered representative in the securities industry since 1987, Respondent was obligated by NASD and FINRA Rules to disclose these events to his employer firm, and to ensure that they were reflected in timely amendments to his Uniform Application for Securities Industry Registration or Transfer ("Form U4") filed with the Central Registration Depository ("CRD"). His failure to meet these obligations led to the Complaint and hearing in this case.

Respondent filed his first bankruptcy petition in 1989. He did not disclose it until 1996, when he amended his Form U4 as he began employment with a new firm. Six years later, in 2002, Respondent filed another bankruptcy petition; it was dismissed in 2005. The Complaint does not include Respondent's failure to make timely disclosures and the appropriate amendments to his Form U4 in connection with these bankruptcy petitions.

In 2005, Respondent filed his third bankruptcy petition. Subsequently, from 2009 to 2011, four tax liens - one state tax and three federal - were filed against him. However, Respondent did not disclose any of these events to his employer firm as he should have, and he neglected to amend his Form U4 until his employer learned of them in 2011.

The Complaint charges Respondent with willfully failing to disclose the 2005 bankruptcy and the four lien filings to his firm, and willfully failing to make timely amendments to his Form U4, in contravention of Article V, Section (2) of the NASD and FINRA By-Laws, violating NASD Rule 2110 and IM-1000-1, and FINRA Rules 1122 and 2010. Enforcement requests a finding that these violations were willful, and asks the Hearing Panel to impose a six month suspension in all capacities, and a fine of $5,000. 

Respondent does not contest the facts alleged in the Complaint, but he urges the Hearing Panel to refrain from finding his conduct willful. He argues that a finding of willfulness is unduly harsh. A finding of willfulness subjects Respondent to statutory disqualification from the applied in this case are those existing at the time of the conduct at issue. . .

Willfullness And Statutory Disqualification

As the recitation of FINRA's allegations suggest, it didn't end well for McCune. The OHO found that he had willfully failed to file timely disclosures and fined him $5,000 plus costs, and suspended him for six months from associating in any capacity with any FINRA member. The finding of willfulness subjects McCune to statutory disqualification. 

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 Form U4 asks the following:

Financial Disclosure

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?

The Impact of Willfulness

The finding of willful (intentional) failure to timely disclose a material fact as required on the Form U4 will expose you to a statutory disqualification.  For those of you who enjoy a good puzzle, here's the language from the cited section of the 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.

Defining Willful

In wrestling with whether McCune's conduct was "willful," the OHO Panel restated the premise for such a finding (footnotes omitted): 

A violation is willful if a person knows what he is doing when he acts in violation of the applicable rules and federal securities laws. In other words, if a person voluntarily does something that is prohibited, the violation is willful. In the context of a Form U4 disclosure violation, it is enough if a person provides false information on a Form U4 "of his own volition," and that the false answer is "neither involuntary nor inadvertent." It is not necessary to show that a person intended to violate a rule, or knew of the particular rule he violated, to establish that a violation is willful.

In determining whether and how to apply the test for willfulness, this Panel seemed to focus heavily on numerous examples of what they deemed to be McCune's bad faith or lack of remorse.  In cases such as this that involve allegations of belated or failed disclosures, obviously the length of time between the required and belated disclosures weigh heavily on any Panel. Notwithstanding, respondents are sometimes able to offer explanations that may not excuse their misconduct but re-positions it within the realm of "inadvertent" rather than "willful."  Unfortunately for McCune, this Panel was perturbed with many of his explanations, to the extent that it deemed his conduct to be "egregious."   When a respondent is trying to deflect a finding of willfulness, it sure as hell is not going to help matters if a hearing panel finds his conduct egregious. As the Decision confirms, the Panel concluded that McCune: 

[D]id not accept responsibility for and acknowledge his misconduct to his firm or to FINRA prior to detection and intervention by his firm. It was not until Royal Alliance confronted Respondent, after discovering in a credit check that Respondent had undisclosed bankruptcies and liens, that he admitted their existence. And his explanation fell far short of an acknowledgement of his misconduct. Rather, Respondent attempted to evade such acknowledgement: he sent an e-mail to Royal Alliance' s management in which he claimed that "[s]omehow" he "had the understanding that the U-4 did not require bankruptcy disclosure," and, with regard to his failure to disclose the liens, that he "(obviously incorrectly) thought that this referred to liens for civil judgements (lawsuits) although the language does not specify any particular type of lien." Tellingly, he added that this was "probably not [a] very satisfactory explanation. . .

In driving its concerns home, the Panel pointedly explained that 

[T]he filing of a bankruptcy petition is not an inconsequential event for anyone, particularly for one working in the securities industry, and that Respondent filed three bankruptcy petitions over the course of his career. We also must take into consideration the fact that Respondent possesses a law degree; previously worked, albeit briefly, for the IRS; and during his securities industry career worked in a managerial capacity for a time, during which he was responsible for reviewing the Form U4 filings of representatives he supervised. Furthermore, the annual compliance questionnaires he filled out, and the two Form U4s he filed with misleading answers to direct questions as to whether he had any bankruptcies lead us to conclude that Respondent's misconduct constituted a pattern, extending over a period of years, and included his concealment of the truth from his firm and from FINRA.

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