June 7, 2018
In today's BrokeAndBroker.com Blog we watch a Wall Street career short-circuit, fizzle, and burn out following allegations that the registered person was charged with felonies for using gift cards procured from stolen information. As much as we would like to dismiss this as a very rare and isolated scenario, FINRA continues to publish settlements involving similar fact patterns. Enough is not always enough. An honest living is not always the goal. In the end, it's hard to understand what motivates someone to stray off the path when the consequences are so onerous and the benefits seem absurdly paltry.
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, Paula Darline Galbadores submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Paula Darline Galbadores, Respondent (AWC 20160523540010, June 5, 2018).
The AWC asserts that Galbadores entered the securities industry in March
2011 as an independent contractor with FINRA member firm PFS Investments, Inc. The AWC asserts that "Galbadores has no relevant disciplinary history in the securities industry."
The AWC asserts that on May 22, 2016, Galbadores was arrested and charged
with six felonies involving identity theft and her use of stolen personal identifying
information to procure gift cards for her personal use.
Question 14A(1)(a): "Have you ever been convicted of or pled guilty or nolo contendere ("no contest") in a domestic foreign or military court to any felony?"
Question 14A(1)(b): "Have you ever been charged with any felony?"
According to FINRA's online Form U4 Explanation of Terms:
Charged: Means being accused of a crime in a formal complaint, information, or indictment (or equivalent formal charge).Note the distinction between a mere "arrest" and that of "charged," as set forth online in FINRA "Form U4 and U5 Interpretive Questions and Answers" :
Q3: If a registered person is arrested but not charged with a crime, is the arrest required to be reported?A: No. An arrest without a charge is not required to be reported. (02/13/98)
Article V of FINRA's By-Laws:Application for Registration, Section 2 in part states:
(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.
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.
Statutory Disqualification for Willful Non-Disclosure
Section 3(a)(39) of the Securities Exchange Act provides in pertinent part:
(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.
In affirming a "willful" non-disclosure finding by FINRA, the Securities and Exchange Commission ("SEC") offered a definition of "willful" 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):
[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)).
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.
AWC Settlement Understanding
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 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 these omissions make me subject to a statutory disqualification with respect to association with a member.
OHO Willfulness Finding
If you do not opt to settle and demand your day in court, a FINRA OHO Decision may state the following:
For willfully failing to timely update 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 is suspended from associating with any FINRA member firm in any capacity for [insert dates] and fined [insert amount]. Because his misconduct was willful, and the information he failed to disclose was material, he is subject to statutory disqualification.
Untimely Update About Felony Charges
The AWC alleged that Galbadores should have updated her response to question 14A(l)(b) of Form U4 by June 21, 2016, which was within 30 days of the date of her felony charges; however, she did not so disclose until October 26, 2016.
Non-Disclosure of Felony Plea
Further, the AWC alleges that on November 16, 2016, Galbadores entered a nolo contendere plea to two felony crimes related to identity theft, which subjected her to statutory disqualification, and also obligated her to update within 10 days (November 26, 2016) her response to Form U4 Question 14A(1)(a); whoever, she did not so disclose her conviction during her employment with PFS Investments.
Permitted to Resign
The AWC asserts that:
On December 6, 2016, the Firm filed a Form U5 reporting Galbadores had been
permitted to resign ". . due to the nature of the disclosure event . ." The referenced
disclosure event, recorded at Section 7C of the Form U5, reported that Galbadores
had been charged with a felony
FINRA deemed Galbadores cited misconduct to constitute willful violations of Article V, Section 2(c) of FINRA's By-Laws, and FINRA Rules 1122 and 2010. In accordance with the terms of the AWC, FINRA imposed upon Galbadores a $5,000 fine and a six-month-suspension from association with any FINRA member in all capacities. As further noted in the AWC:
I understand that if I am barred or suspended from associating with any FINRA member, I become subject to a statutory disqualification as that term is defined in Article III, Section 4 of FINRA's By-Laws, incorporating Section 3(a)(39) of the Securities Exchange Act of 1934. Accordingly, I may not be associated with any FINRA member in any capacity, including clerical or ministerial functions, during the period of the bar or suspension (see FINRA Rules 8310 and 8311).
The fine shall be due and payable either immediately upon reassociation with a member firm, or prior to any application or request for relief from any statutory disqualification resulting from this or any other event or proceeding, whichever is earlier.