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.
Definition of DisqualificationSec. 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.
Application for Registration(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(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.
(2) such other reasonable information with respect to the applicant as the Corporation may require.
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.
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?
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."
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.
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.
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.
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
Pages 11 -12 of the Elgart OHO DecisionThe 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.
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 . . .
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.
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.
Now, consider this FINRA finding of misconduct as affirmed in Elgart's NAC Decision: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.
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.