Where There's Willfulness There's No Way At FINRA

March 28, 2017

Few issues appear more frequently on the regulatory docket of the Financial Industry Regulatory Authority than allegations about a registered representative's failure to timely disclose tax liens. In recent years, the BrokeAndBroker.com Blog has criticized the self-regulatory organization's seemingly inconsistent findings -- at times, bordering on arbitrary and capricious -- that respondents have willfully failed to disclose their liens. Although the BrokeAndBroker.com Blog's publisher Bill Singer, Esq. readily concedes that the majority of such disclosure failures are likely willful, he remains adamant that FINRA must be meticulous in explaining why apparently similar fact-patterns produce disparate labels of willful and non-willful disclosure. Given that the finding of willful non-disclosure renders respondents "statutorily disqualified" from securities industry employment, FINRA has an obligation when settling or adjudicating these cases to provide concise definitions and explanations, pursue consistency in its charges, and ensure fairness in its sanctions. As today's featured cases demonstrate, FINRA is still falling short when discharging its mandate.


The Rule Book

With the deadline for filing 2016 tax returns near, associated persons may lack the funds to pay the taxes due. In response to such a shortfall, individuals are faced with many choices: some legal, some not; some sensible, some foolish. The April filing deadline marks the beginning of a trying period for many taxpayers during which they will try to arrive at some arrangement with state and federal taxing authorities. If negotiations are successful, a payment schedule might result. If negotiations fail, the taxpayer may be the subject of tax liens -- and as is often the case, such a financial predicament indicates the likelihood that other creditors are losing patience and may take steps resulting in civil judgments. Frequently, the crush of income-tax liens and civil judgments lead to a petition seeking a discharge in bankruptcy. 

Wall Street's associated person are faced with some unique employment, compliance, and regulatory issues when confronted by liens, civil judgments, and bankruptcy. Consequently, make sure to secure competent legal counsel when considering how to handle any potential non-payment of taxes or creditors. What you do and how you do it could have devastating career impact.  As to some of your disclosure obligations, let's briefly consider a few rules and regulations pertaining to your disclosure obligations pertaining to liens, judgments, and bankruptcies.

Article III of FINRA's By-Laws: Qualifications of Members and Associated Persons provides:

Definition of Disqualification

Sec. 4.  A person is subject to a "disqualification" with respect to membership, or association with a member, if such person is subject to any "statutory disqualification" as such term is defined in Section 3(a)(39) of the Act.

Article V of FINRA's By-Laws: Registered Representatives and Associated Persons, provides [Ed: highlighting emphasis provided]:

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?

Statutory Disqualification for Willful Non-Disclosure

If an associated person willfully fails to disclose financial issues such as tax liens, Wall Street's regulators and the federal courts would likely deem that individual subject to a statutory disqualification. Under Section 3(a)(39) of the Exchange Act, in pertinent part, statutory disqualification attaches if:

such person . . . has willfully made . . . in any application for membership or participation in, or to become associated with a member of, a self-regulatory organization, . . . any statement which was at the time, and in 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 . . . report . . . any material fact which is required to be stated therein."

The Securities and Exchange Commission ("SEC") recently affirmed a "willful" non-disclosure finding by FINRA, In the Matter of the Application of Michael Earl McCune for Review of Disciplinary Action Taken by FINRA (Opinion, SEC, '34 Act Rel. No. 77375; Admin. Proc. File No. 3-16768 / March 15, 2016), and federal regulatory reiterated that:

[A] willful violation of the securities laws means "intentionally committing the act which constitutes the violation."16 The laws do not require that the actor "also be aware that he is violating one of the Rules or Acts."17 If McCune voluntarily committed the acts that constituted the violation, then he acted willfully.

=====

Footnote 16: Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965); see also Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (citing Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949)); Craig, 2008 WL 5328784, at *4 (finding that respondent willfully violated IM 1000-1 and NASD Rule 2110 by providing false answers on his Form U4).

Footnote 17: Wonsover, 205 F.3d at 414 (citing Gearheart & Otis, Inc. v. SEC, 348 F.2d 798 (D.C. Cir. 1965)).

If you opt to settle a finding by FINRA that you were guilty of willful nondisclosure, the self-regulator's Letter of Acceptance, Waiver and Consent settlement typically contains the following admonition:

I understand that this settlement includes a finding that I willfully omitted to state a material facts 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 these omissions make me subject to a statutory disqualification with respect to association with a member.

Case In Point: Cederberg FINRA Settlement Order

In response to the filing of a Complaint on October 10, 2016, by the Department of Enforcement of the Financial Industry Regulatory Authority ("FINRA"), Respondent Jeffrey S. Cederberg submitted an Offer of Settlement dated March 13, 2017, which the regulator accepted.  Under the terms of the Offer of Settlement, without admitting or denying the allegations in the Complaint, Respondent Jeffrey S. Cederberg consented to the entry of findings and violations and to the imposition of the sanctions. FINRA Department of Enforcement, Complainant, vs Jeffrey S. Cederberg, Respondent (Order Accepting Offer of Settlement, FINRA Office of Hearing Officers, 2014040815101, March 21, 2017) (the "Cederberg Order").

2009 - 2010: Three Tax Liens

The Cederberg Order asserts that he was first registered in 2002 and, as set forth in pertinent part:

8. ln 2009 and 2010, federal and state tax authorities filed three tax liens against Cederberg, as follows:

a. On or about April 14, 2009, the Internal Revenue Service recorded a tax lien against Cederberg in the amount of $33,152. This lien was released in July 2016.

b. On or about May 4, 2009, the State of California recorded a tax lien against Cederberg in the amount of $35,093. This lien remains unsatisfied.

c. On or about January 20, 2010, the State of California recorded a tax lien against Cederberg in the amount of $1,958. This lien remains unsatisfied.

9. Cederberg was aware of each of the above liens and listed them in a Chapter 7 bankruptcy filing made in June 2012 in the United States Bankruptcy Court.

10. The three tax liens constituted material information that Cederberg was obligated to timely disclose on his Form U4.

11. Nevertheless, Cederberg failed to disclose the three tax liens on his Form U4 until April 2, 2015, following an inquiry from FINRA staff.

FINRA Offer of Settlement Sanctions

FINRA deemed Cederberg's non-disclosure to constitute violations of Article V, Section 2(c) of FINRA's By-Laws, NASD IM-1000-1 (for the conduct on or before August 16, 2009), FINRA Rule 1122 (for the conduct on or after August 17, 2009), and FINRA Rule 2010. Notably, the Cederberg Order found that although three tax liens had been filed against Cederberg in 2009 and 2010, he had failed to timely amend his Form U4 to undertake the required disclosure until 2015. FINRA fined Cederberg $5,000 and suspended him for four-months in any capacity with any FINRA member.

Cederberg: A Recap

By way of brief recap, Cederberg had failed to amend his Form U4 until about six years after the 2009 IRS and California liens, and until about five years after the 2010 California lien. FINRA's By-Laws requires that such amendments be made within 30 days of becoming aware of the existence of a lien. The Cederberg AWC asserts that he knew of the three cited tax liens by June 2012 because they were disclosed in his Chapter 7 bankruptcy filing.

Let's put a pin in Cederberg and consider a similar fact pattern in another FINRA tax lien disclosure case.

Case In Point: Elgart FINRA Contested Hearings

David Elgart entered the securities industry in 1976, and by 1998, he had become the President and Chief Compliance Officer of FINRA member firm Sequoia Investments, Inc., of which he was a majority owner since 2001.  Sequoia mainly sells municipal bonds to High-Net-Worth clients and the firm's employees consist of Elgart, a salesman, a trader, and an outside Financial and Operations Principal.

2003 to 2010: Six Tax Liens

Following Elgart's 2001 purchase of Sequoia, he claimed that a dispute arose concerning various tax implications of the transaction. Whatever those issues were, starting in June 2003 and extending for seven years to June 2010, the State of Georgia and the Internal Revenue Service filed against Elgart six tax liens totaling $407,931.78.  Sometime towards the end of 2012, Elgart asserts that he retained a lawyer to assist him in dealing with the taxing authorities and it was only during his first meeting with counsel, on January 1, 2013, that he learned how many tax liens were outstanding.

2013 U4 Amendments

In late 2013,  FINRA conducted a routine examination of Sequoia and during preparation for the exam, Staff discovered various unreported tax liens. On December 19, 2013, Staff asked Elgart to confirm the accuracy of the tax liens.  Purportedly, Elgart first amended his Form U4 to disclose the 2003 to 2010 tax liens on December 23, 2013.

In response to FINRA Staff questions as to why he had not timely disclosed the liens, Elgart purportedly stated in a March 7, 2014, letter that he had delegated the filing of Sequoia's taxes to his wife and accountants and was unaware of any need to disclose the liens on his U4. Elgart characterized any non-disclosures as inadvertent.

2015 FINRA Complaint

On November 10, 2015, FINRA's Department of Enforcement filed a two-cause Complaint against Elgart alleging that he had:
  1. failed to amend his Form U4 to disclose five tax liens totaling almost $390,000, dated between June 2003 and June 2010, until December 23, 2013; and
  2. misled FINRA by falsely completing and submitting to FINRA a Personal Activity Questionnaire ("PAQ")
OHO Hearing

On April 6, 2016, a FINRA Office of Hearing Officers ("OHO") Hearing Panel conducted a one-day hearing; and, thereafter, issued a Decision in which the issues are summarized as follows in the "Introduction" [Ed: Footnotes omitted]:

From June 2003 to June 2010, federal and state authorities filed a series of tax liens against Respondent David Adam Elgart. Elgart did not timely amend his Uniform Application for Securities Industry Registration or Transfer Form ("Form U4") to disclose the outstanding liens, as FINRA By-Laws and rules require.

The primary issue presented in this case is whether Elgart's decade-long failure to amend his Form U4 was willful. Elgart claims it was not. He asserts that he mistakenly believed that because the liens were personal and unrelated to his securities business, he was not required to disclose them. Elgart claims this is also why he incorrectly stated that there were no unsatisfied liens filed against him when he responded to a FINRA staff questionnaire preceding a routine examination of his firm.

The Complaint's first cause of action alleges that Elgart learned about each of the liens close to the time they were filed, "or at least by January 2013." It charges that Elgart's Form U4 was amended 13 times between July 2003 and December 2013, without disclosure of the liens.

The NASD and FINRA By-Laws provide that a person must keep the information on his Form U4 current by filing amendments within 30 days of learning of changes of reportable circumstances. The Complaint's first cause of action charges that Elgart failed to amend his Form U4 in violation of Article V, Section 2(c) of the By-Laws. In addition, the Complaint alleges that his failure violated NASD IM-1000-1, FINRA Rule 1122, NASD Rule 2110, and FINRA Rule 2010.

The Department of Enforcement alleges that Elgart's failure to disclose was willful and the information about the tax liens was material. Finding that Elgart acted willfully and that the information omitted was material would subject him to statutory disqualification from the securities industry, "potentially a more severe sanction than a monetary penalty or temporary suspension." FINRA's By-Laws provide that a person subject to statutory disqualification cannot be associated with any FINRA member firm unless the firm obtains permission from FINRA.

The Complaint's second cause of action alleges that Elgart falsely answered a questionnaire FINRA sent in connection with a routine examination of his firm. In it, Elgart denied he had pending unsatisfied liens. Enforcement alleges that by giving this false answer, Elgart acted in bad faith, misled FINRA, and violated the high standards of commercial honor and just and equitable principles of trade required of him by FINRA Rule 2010.

In the Matter of Department of Enforcement, Complainant, v. David Adam Elgart, Respondent (OHO Decision, Complaint #2013035211801 / June 3, 2016) (the "Elgart OHO Decision").

OHO: Ignorance Is No Defense

The OHO Hearing did not go well for Elgart. In summarizing its findings as to his willful non-disclosure of his tax liens, the OHO Panel concluded [Ed: Footnotes omitted]:

Elgart's assertion-that he did not act willfully because he was unaware he was required to report-is unconvincing. As explained in a recent FINRA Hearing Panel decision, a respondent's "claim that he did not know that he needed to report [a] bankruptcy is not a valid defense. A registered representative is presumed to know and abide by FINRA Rules." This statement is consistent with recent and long-standing decisions issued by the NAC and the SEC. The NAC recently held, in a decision upheld by the SEC, that a representative's claim that he did not understand the importance of FINRA's Form U4 disclosure requirements was "no defense" to a charge of willful failure to disclose. Rather, a registered representative is responsible "to ensure that his Form U4 is accurate." In reviewing a willful violation, the SEC observed that "securities industry professionals . . . have a responsibility to understand their duties to the investing public and to comply with the applicable rules and regulations which govern their behavior." A claim of not knowing that a fact has to be disclosed fails because "ignorance of the . . . rules is no excuse for their violation."

Elgart claims that although he understood he must disclose "bankruptcies, financial conflicts created by receipt of compensation, certain business affiliations and/or relationships, and almost any kind of regulatory action," he "was simply unaware" he had to report his personal liens. Citing a leading case, he argues that his omissions were the equivalent of "an inadvertent filing of an inaccurate form," and do not support a finding that he "falsely and intentionally denied having 'any unsatisfied judgments or liens.'"

However, in the case Elgart cites, the SEC found the respondent acted willfully in part because there was "substantial evidence to support the SEC's finding that [the respondent] received the IRS notices . . . and was aware of the tax liens when he filed his . . . Forms U4." Here, Elgart's own testimony provides substantial evidence that he received the notices of the liens and turned them over to his wife and accountant, and was therefore aware of them when they were filed. Furthermore, he testified that he made a conscious determination that he was not required to report them. Contemplating whether he had to disclose the liens, then deciding that he need not because they were filed against him personally,suffices to establish that Elgart acted willfully. Furthermore, Question 14M's plain, unambiguous wording makes unreasonable Elgart's claim that he did not understand he was required to disclose the liens. Because Elgart "knew what he was doing when he did not timely amend the forms to disclose" the liens he knew had been filed, when he answered "No" to Question 14M in the 13 amendments, Elgart acted willfully. Finally, based upon Elgart's demeanor at the hearing, and the evidence presented, the Panel finds his claimed ignorance of Question 14M is not credible; even if it were, it is not a defense.

For these reasons, the Panel concludes that Elgart willfully violated Article V, Section 2(c) of NASD's and FINRA's By-Laws, NASD IM-1000-1, and FINRA Rule 1122 by failing to timely amend his Form U4 to disclose the five unsatisfied liens, and by filing 13 misleading amendments to his Form U4 that did not disclose the liens. By doing so, Elgart engaged in conduct inconsistent with the standard of just and equitable principles of trade in violation of NASD Rule 2110 and FINRA Rule 2010.

Pages 10 - 11 of the Elgart OHO Decision

The PAQ Responses

Elgart fared no better with the OHO Panel on the issue of his untruthful responses to the PAQ. On that issue the OHO Panel concluded that:

The Panel finds Elgart's claims that he "intended" to be truthful in his PAQ answer, and his answer was truthful and accurate, are not credible. Almost identical to the Form U4's Question 14M, the wording of the PAQ question is simple, straightforward, and unambiguous. It does not lend itself to Elgart's claimed misinterpretation.

Elgart answered the PAQ question on November 25, 2013. By Elgart's account, this was almost a year after he met to review his liens with a tax attorney and an accountant. The liens and his argument with the IRS were not insignificant matters in his life; he testified, credibly, that he had found the number of liens and their amounts troubling.

Under these circumstances, Elgart's assertion that he honestly believed the PAQ question did not require him to disclose his unsatisfied liens is not believable. Instead, the Panel concludes that Elgart, a seasoned securities professional, fully understood the question, but chose to answer it dishonestly to mislead FINRA. By doing so he acted unethically and in bad faith, in violation of NASD Rule 2110 and FINRA Rule 2010.

Pages 11 -12 of the Elgart OHO Decision

OHO Order

In accordance with its findings, the OHO Panel issued the following Elgart OHO Order, in pertinent part:

For willfully failing to timely update his Form U4, in violation of Article V, Section 2(c) of NASD's and FINRA's By-Laws, NASD IM-1000-1, NASD Rule 2110, and FINRA Rules 1122 and 2010, Respondent David Adam Elgart is suspended from associating with any FINRA member firm in any capacity for six months and fined $15,000. Because his misconduct was willful, and the information he failed to disclose was material, he is subject to statutory disqualification.

For providing FINRA with a false answer to a question on a Personal Activity Questionnaire, in violation of FINRA Rule 2010, Elgart is suspended from associating with any FINRA member in any capacity for 30 business days and fined $5,000. The suspensions shall run consecutively.

Elgart is also ordered to pay the hearing costs in the amount of $1,759.42, consisting of an administrative fee of $750, and the cost of the hearing transcript . . .

NAC Appeal

FINRA's National Adjudicatory Council ("NAC") affirmed the OHO Decision in part by affirming its finding that Elgart had willfully failed to timely update his Form U4 and had provided false statement to FINRA. The NAC vacated OHO's findings that Elgart had filed 13 misleading Form U4 amendments because the Complaint did not allege any such violation. Finally, the NAC affirmed the OHO sanction. In the Matter of Department of Enforcement, Complainant, v. David Adam Elgart, Respondent (NAC Decision; Complaint #2013035211801 / March 16, 2017) (the "Elgart NAC Decision"). The Elgart NAC Decision offers a thoughtful and comprehensive rationale for a finding of willfulness [Ed: Footnotes omitted]:

If Elgart "voluntarily committed the acts that constituted the violation, then he acted willfully." McCune, 2016 SEC LEXIS 1026, at *15; see also Amundsen, 2013 SEC LEXIS 1148, at *38 ("A failure to disclose is willful... if the respondent of his own volition provides false answers on his Form U4."); Jason A. Craig, Exchange Act Release No. 59137, 2008 SEC LEXIS 2844, at *13 (Dec. 22, 2008) (same). A finding of willfulness "do[es] not require that the actor'also be aware that he is violating one of the Rules or Acts"' or that he acted with a culpable state of mind or scienter. McCune, 2016 SEC LEXIS 1026, at *15, 19 (citing, inter alia, Wonsover v. SEC, 205 F.3d 408,414 (D.C. Cir. 2000)). On the other hand, as Elgart emphasizes, a federal court of appeals has stated that an "inadvertent filing of an inaccurate form" would not support a finding of willfulness. Mathis v. SEC, 671 F.3d 210, 218 (2d Cir. 2012); cf. Amundsen, 2013 SEC LEXIS 1148, at *38 (noting, in making findings of willfulness, that respondent's conduct was neither "involuntary nor inadvertent"); Tucker, 2012 SEC LEXIS 3496, at *42 (same).

Elgart acted willfully. Elgart concedes that he was aware of the numerous tax liens around the time that the liens were issued. See McCune, 2016 SEC LEXIS 1026, at *15-19 (finding that respondent willfully failed to amend Form U4 where, among other things, he knew about the bankruptcies and liens that were required to be disclosed). The record also demonstrates that Elgart was aware of his obligation to amend his Form U4 to disclose liens. See id at *15-19 (finding that respondent willfully failed to amend Form U4 where respondent "was clearly aware of the requirement to amend his Form U4 to disclose bankruptcies and liens"). The requirement to amend the Form U4 is based in FINRA rules, and a registered representative is "presumed to know and abide by FINRA Rules." Dep't of Enforcement v. Zayed, Complaint No. 2006003834901,2010 FINRA Discip. LEXIS 13, at *23 (FINRA NAC Aug. 19, 2010) (citing Carter v. SEC, 726 F.2d 472,474 (9th Cir. 1983)). The Forms U4 and accompanying instructions warned and reminded Elgart of his obligation to amend his Form U4 with accurate information. See Mathis, 671 F.3d at 218-219 (finding that appellant willfully failed to amend his Form U4 to disclose tax liens where, among other things, Forms U4 that he had filed warned and reminded him that he was under a continuing obligation to disclose changes to previously reported answers). And Elgart admits on appeal that he was aware that Form U4 contained a question about liens. The liens question is unambiguous, straightforward, and clear. Elgart' s failure to amend his Form U4 with accurate information about his tax liens was a voluntary act and, therefore, willful. This finding of willfulness is only bolstered by Elgart's repeated actions to conceal several liens, not just by repeatedly failing to amend Form U4 but also by falsely answering the liens question on the PAQ. See Tucker, 2012 SEC LEXIS 3496, at *44 n.56 ("Although scienter is not necessary to establish willfulness,... efforts to conceal violative conduct demonstrate scienter.").

Elgart's primary challenge to a willfulness finding is that prior to December 2013-when he finally updated his Form U4 with information about the liens-he misread Question 14M as asking only for information about liens 'that could endanger or impact [Sequoia Investments] and its clients" and believed that his tax liens could have had no such effect. Elgart asserts that his understanding of Question 14M changed only in December 2013, when he had a conversation with FINRA staff about whether he needed to disclose the liens on his Form U4. He claims that his failure to disclose the liens was inadvertent and not intentional, that he was not attempting to "obfuscate this information," and that he "truly believed" that his "No" response to Question 14M was accurate. The Commission, however, has rejected defenses to allegations of willfulness that, like Elgart's, were based on interpretations of Form U4 disclosure questions that were contrary to their plain language, limitations that did not exist in the text of the questions, or a respondent's alleged confusion or lack of understanding about the meaning of a Form U4 disclosure question. Neaton, 2011 SEC LEXIS 3719, at *29-30 (finding, in a discussion about respondent's willfulness, that a respondent's interpretation of one Form U4 disclosure question was ''contrary to its plain language" and that his interpretation of another Form U4 question as ''limited to findings arising from investment activity" was not suggested by the question itself); Mathis, 2009 SEC LEXIS 4376, at *21-22 (holding, in a discussion about respondent's willfulness, that respondent "ha[d] a duty to comply with all applicable NASD requirements," that"ifhe found [the Form U4 question about liens] to be ambiguous, it was his duty to determine whether disclosure was required," and that "[i]gnorance of the [NASD]'s rules is no excuse for their violation"); Craig, 2008 SEC LEXIS 2844, at *15-16 (rejecting respondent's arguments, in a discussion about his willfulness, that "he did not understand the questions on the Form U4" and "that he did not know that he needed to disclose misdemeanors," and holding that "ignorance of the NASD's rules is no excuse for their violation").

Regardless, the Hearing Panel considered Elgart's claim that he did not understand he was required to disclose the liens, and it found that Elgart's "claimed ignorance of Question 14M is not credible" based both on his "demeanor at the hearing" and "the evidence presented." We defer to this credibility determination. As explained below, the record supports it and contains no substantial contrary evidence. See Daniel D. Mano#; 55 S.E.C. 1 155, 1162 & n.6 (2002) (explaining that a Hearing Panel's credibility determination is entitled to deference absent substantial evidence to the contrary).

First and foremost, Elgart's claimed misunderstanding of Question 14M has no basis in the text of the question itself; which is "unambiguous" and "contains no limitations on the kinds ofliens required to be disclosed." Tucker, 2012 SEC LEXIS 3496, at *36-37,38 n.44; see also Mathis, 2009 SEC LEXIS 4376, at *21-22, 28 (holding that the question about unsatisfied judgments or liens "contains no limitations on the kinds of liens required to be disclosed," that 'the plain language of the Form U4 . . . asks for 'any' liens," and that "there is nothing ambiguous about whether an IRS tax lien constitutes a 'lien"'); cf Amundsen, 2013 SEC LEXIS 1148, at *31 (finding that respondent's testimony about his interpretations of Form U4 disclosure questions lacked credibility, where the definition of a term in one disclosure question was written in plain language" and where another disclosure question was ''explicit and unambiguous"). It strains credulity for Elgart to assert that an industry veteran like himself who had decades of industry experience, was a general securities principal, president, and chief compliance officer of his firm, and had overarching responsibility for Form U4 registration filings-misunderstood such an unambiguous question.

Moreover, the reasons that Elgart cited for his purported misunderstanding of Question 14M do not logically support any such misunderstanding. For example, Elgart contended that his misunderstanding stemmed from the facts that "I operate... Sequoia Investments alone with a modicum of assistance," and "leave my wife and our accountants with the responsibility of filing our taxes," but those facts have nothing to do with Elgart's understanding of; or compliance with, his obligations to disclose his tax liens on Form U4. Likewise, Elgart contended that he delegated the responsibility of filing Forms U4 to Sequoia Investments' FINOP and received no notice about his disclosure obligation from anyone at Sequoia Investments. But Elgart never informed the FINOP about his tax liens, and Elgart had an independent responsibility to understand his disclosure requirements. Cf Tucker, 2012 SEC LEXIS 3496, at *37 (holding that the "[respondent]... was in the best position to provide accurate information about the judgments, bankruptcies, and liens covered by the questions in the Forms U4, demonstrating why it was appropriate that he bore 'primary responsibility for maintaining [their] accuracy"'); Neaton, 2011 SEC LEXIS 3719, at *22-23 (rejecting a respondent's defense to allegations of willfulness that his firm's "failure to advise" him of the duty to amend his Form U4 '"reinforced [his] erroneous understanding of [his] duty to amend [his] Form U4" because "securities industry registrants must take responsibility for compliance and cannot be excused for lack of knowledge, understanding or appreciation of these requirements") (internal quotation marks omitted); Mathis, 2009 SEC LEXIS 4376, at *22 (finding that if a respondent found a disclosure question to be ambiguous, it is the respondent's responsibility to "determine whether disclosure was required").

Finally, Elgart's lack of credibility was further evidenced-as the Hearing Panel thoroughly explained-by his numerous inconsistent explanations of when he became aware of the liens. By our count, between December 23, 2013 (when he finally disclosed his liens on a Form U4 amendment) and April 6, 2016 (when he testified at the hearing), Elgart provided no less than five different accounts of when he became aware of the liens. These accounts included a statement in his answer in which he denied-contrary to his later admission-that he was put on notice of the liens at or about the time each was recorded.

Elgart does not point to any evidence that would warrant not deferring to the Hearing Panel's credibility determination. Elgart asserts that the fact that he amended his Form U4 shortly after he met with FINRA staff in December 2013 supports his testimony that he previously had a mistaken understanding of Question 14M. It is entirely consistent with the record, however, to determine that the reason Elgart updated his Form U4 was not because he was previously mistaken about Question 14M but only because FINRA staff directly confronted him. We also reject Elgart's argument that his credibility is demonstrated by his "consistent" assertions that he had a mistaken understanding of Question 14M. Those consistent assertions are not contrary to the Hearing Panel's credibility determination; rather, they are equally compatible with a finding that Elgart has consistently lied about his understanding of Question 14M.

In conclusion, Elgart's failure to amend his Form U4 with information about his tax liens was willful. Elgart was aware of his tax liens and of the straightforward requirement to disclose tax liens on his Form U4, yet he voluntarily did not timely update his Form U4 to disclose his tax liens.

Pages 9 -12 of the Elgart NAC Decision

Leaving It All On The Field

The Elgart OHO and NAC Decisions are about as good as such things get at FINRA: The two Decisions are meticulous, detailed, thoughtful, and offer substantive explanations for the rationale behind the key findings. As to the issue of why Elgart's failure to amend was not merely inadvertent or accidental but "willful," both panels have exhausted themselves and us with all the allegations, assertions, conclusions, findings, and rationale. One also senses that Elgart's lawyer did a remarkable job of arguing the merits of his client's defenses. Both sides left it all on the field. This is the adversarial system at its best. It's a self-regulatory tour de force.

Except it's not.

Bear with me as I try to make my point.

Let's try to come up with an explanation as to why Elgart's untimely disclosures were deemed "willful" by FINRA. As the NAC Decision summed it up:

In conclusion, Elgart's failure to amend his Form U4 with information about his tax liens was willful. Elgart was aware of his tax liens and of the straightforward requirement to disclose tax liens on his Form U4, yet he voluntarily did not timely update his Form U4 to disclose his tax liens.

Three-Prong Willfulness Test

The above NAC nugget from Elgart presents us with a three-prong test for willful nondisclosure:
  1. an awareness of the existence of tax liens;
  2. an awareness of the requirement to timely disclose said liens on his Form U4; and
  3. a voluntary decision to not timely update Form U4 to make the necessary disclosure
Cederberg and Elgart: Irreconcilable Differences

Remember how we began today's BrokeAndBroker.com Blog? We started with the Cederberg settlement in which a respondent had failed to timely update his Form U4 for a period of several years. After reading the Cederberg Order and the Elgart OHO and NAC Decisions, the two fact-patterns in both cases seems fairly similar in terms of the basics of the non-disclosure of several tax liens over an extended period of years (with Elgart having the additional PAQ issue).

FINRA fined Cederberg $5,000 and suspended him for four-months in any capacity with any FINRA member. FINRA fined Elgart $5,000 and imposed two separate suspensions to be served consecutively of 30-business-days and six-months in all capacities. Like I said, similar facts, similar allegations, similar sanctions.

Except that's just not true.

Consider this FINRA finding of misconduct in the Cederberg Order:

12. By this misconduct, Cederberg failed to timely amend his Form U4 to disclose a federal tax lien and two state tax liens in violation of Article V, Section 2(c) of FINRA's By-Laws, NASD IM-1000-1 (for the conduct on or before August 16, 2009), FINRA Rule 1122 (for the conduct on or after August 17,2009), and FINRA Rule 2010.

Now, consider this FINRA finding of misconduct as affirmed in Elgart's NAC Decision:

For willfully failing to timely update his Form U4, in violation of Article V, Section 2(c) of NASD's and FINRA's By-Laws, NASD IM-1000-1, NASD Rule 2110, and FINRA Rules 1122 and 2010, Respondent David Adam Elgart is suspended from associating with any FINRA member firm in any capacity for six months and fined $15,000. Because his misconduct was willful, and the information he failed to disclose was material, he is subject to statutory disqualification.

For providing FINRA with a false answer to a question on a Personal Activity Questionnaire, in violation of FINRA Rule 2010, Elgart is suspended from associating with any FINRA member in any capacity for 30 business days and fined $5,000. The suspensions shall run consecutively.

Did you catch the subtle difference between Cederberg and Elgart

Cederberg was found to have failed to timely amend his Form U4

Elgart was found to have willfully failed to timely amend his Form U4.

Cederberg was NOT found to have "willfully" failed to timely amend. Good for Cederberg. Pointedly, and I cannot stress this enough, I am NOT suggesting that FINRA should have found that Cederberg had willfully failed to timely disclose.

Bill Singer's Comment

Notwithstanding the clear-cut presentation in the Cederberg Order and the meticulous analysis and rationale in the Elgart OHO and NAC Decisions, no reasonable reader can come away from those documents with an understanding as to why Elgart's non-disclosures were deemed willful but Cederberg's were not. You may have an opinion as to why FINRA handled the two matters in such a disparate fashion, but I challenge you to quote to me specific language from the respective order and decisions that explains why one respondent's conduct was willful but the other was not. Will someone at FINRA please investigate the issues raised in this blog and try to instill more consistency and integrity into the regulation of untimely disclosure. Where there a willfulness there must be a way.