Lien-ing Tower Prompts FINRA Fine And Suspension

January 9, 2015

With a new year upon us, it's often helpful to re-visit lessons that should have been learned from prior years; and what better place to start than what happens when a registered representative fails to report disclosable events. In this first such case of 2015, we find the old combo of liens and judgments, and, for good measure, an added dose of willfulness.

Case In Point

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, Scott Cameron Nicol submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Scott Cameron Nicol, Respondent (AWC  2013036671901, December 31, 2014).

In 1993, Nicol first became registered and, thereafter, was associated with seven FINRA member firms. The AWC asserts that he had no previous disciplinary history.

The AWC alleges that the following reportable events occurred:
  • June 15, 2006: Macomb County, MI Small Claims Court filed a $573 lien against Nicol for funds he owed a creditor (remains outstanding);
  • March 7,2007, IRS filed a $113,147 and a separate $42,319 federal tax lien against Nicol (Nicol released from both liens on April 25,2011);
  • December 11, 2011, a $117,890.56 FINRA arbitration judgment for was entered against Nicol (remains outstanding);
  • On September 7,2012, a $4,533 lien was filed against Nicol in Oakland County, MI. (Nicol released on November 30,2012).
So . . . howsabout a trip down memory lane via the rulebook:

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 Rule 1122: Filing of Misleading Information as to Membership or Registration, provides:

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:

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?

A Matter Of Intent

The AWC asserts that Nicol willfully failed to timely amend his Form U4 to reflect the liens and judgment filed or awarded against him; and also willfully failed to disclose the:
  1. Small Claims Court lien in twenty-four subsequent Form U4 amendments;
  2. federal tax liens in fourteen (14) subsequent Form U4 amendments;
  3. FINRA arbitration judgment in four (4) subsequent Form U4 amendments; and
  4. lien from Oakland County, MI in one subsequent Form U4 amendment
As a result of this foregoing conduct, the AWC alleges that Nicol willfully violated Article V, Section 2, of the NASD By-Laws and NASD Rule 21 10; Article V, Section 2 of the FINRA By-Laws and FINRA Rules 1122 and 2010,

In accordance with the terms of the AWC, FINRA imposed upon Nicol a $5,000 fine and a 6-month suspension from association in any capacity with any FINRA member firm.

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.

As set forth in the AWC, Nicol acknowledged the impact of the "willful" finding:

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

Online FINRA BrokerCheck records as of January 9, 2015, disclose that on November 6, 2013, FINRA member firm L.M. Kohn & Company "Discharged" Nicol based upon allegations that he had:

FAILED TO DISCLOSE AN OUTSTANDING JUDGEMENT ON FORM U-4.

The firm further noted that:

B/D RECEIVED A WRIT OF GARNISHMENT ON A JUDGEMENT DATING BACK TO 2011 THAT WAS NEVER DISCLOSED ON REP'S FORM U-4.

Previously, Merrill Lynch, Pierce, Fenner & Smith Incorporated "Discharged" Nicol on March 19, 2013, based upon allegations on BrokerCheck that Nicol had engaged in:

CONDUCT INCLUDING DISREGARDING MANAGEMENT DIRECTIVES CONCERNING (1) THIRD PARTY RESEARCH, (ii) EMAILING MARKET ANALYSIS, AND (iii) MAINTAINING CONFIDENTIALITY OF A FIRM INTERNAL REVIEW, RESULTING IN VIOLATIONS OF FIRM POLICIES AND MANAGEMENT'S LOSS OD CONFIDENCE.

In response to Merrill Lynch's disclosure, Nicol's offered this statement on BrokerCheck:

MY DISMISSAL WAS MOTIVATED BY MANAGEMNT'S [sic] BELIEF THAT I WAS ABOUT TO LEAVE THE FIRM AFTER ANOTHER VERY PROMINENT FA AND CLOSE ASSOCIATE OF MINE HAD JUST LEFT AND I HAD BEEN EXPECTED TO FOLLOW. MANAGEMENT THEN CITED FRIVOLOUS AND INACCURATE REASONS FOR MY DISMISSAL. ACCORDING TO FORM U-5, I WAS DISMISSED FOR RECEIVING THIRD PARTY RESEARCH THAT MERRILL HAD PREVIOUSLY APPROVED AND REIMBURSED ME FOR AND ALLEGEDLY MENTIONING AN INSIGNIFICANT PART OF A SUPPOSEDLY CONFIDENTIAL INTERNAL REVIEW. EGREGIOUSLY AND WITHOUT ANY MERIT, ML ANSWERED YES TO QUESTION 14J(1) ON U4, WITH NO EVIDENCE OF ANY REASON WHY. I HAVE NEVER, NOR WAS I EVER ACCUSED OF VIOLATING ANY INVESTMENT-RELATED STATUTES, REGULATIONS, OR INDUSTRY STANDARDS OF CONDUCT

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