In the just published In the Matter of the Application of Douglas J. Toth (Securities Exchange Act Rel. No. 58074 / July 1, 2008) http://sec.gov/litigation/opinions/2008/34-58074.pdf, on appeal, the Securities and Exchange Commission (SEC) sustained the NASD finding that by failing to disclose to his former member firm a pending state civil action against him for securities fraud, Toth willfully caused that firm to file on his behalf an inaccurate U4 and also to fail to amend the Form U4. The SEC also sustained the NASD's suspension of Toth in all capacities for one year.
Boiled down to its basics, this is a garden-variety U4 non-disclosure case in which an individual going through financial difficulties and the loss of his own Broker-Dealer, joins another member firm. The twist here is that he joins that firm ostensibly to avoid a lawsuit from an investor in his own failed broker-dealer. Apparently that investor was also a passive investor in the firm to which Toth went.
Unfortunately, and here is where the tale begins to unfold, Toth was named in a State of New Jersey securities fraud civil action in July 2003. That incident is not disclosed on Toth's August 2003 U4 (which was electronically filed on his behalf and he argued --none too convincingly--I say, that he hadn't seen the form before its filing and never signed it). While it is true that he didn't sign the hard copy after the electronic version was submitted, it is equally true that he seemed to evade every effort by the firm to get his signature. Within two months of getting registered, Toth is sued by the passive owner, the State of New Jersey demands to know why he didn't disclose the pending action on the U4, and he quits the member firm. In 2005 he files for bankruptcy AND the State action is dismissed.
Amidst much finger pointing and hazy recollection, Toth is found by NASD to have violated its rules and suspended for one year. All in all, seems fair. In fact, many industry pundits would quickly hone in on the fact that Toth had failed to disclose a case that was dismissed and shrug.
Well, that would be an ill-advised shrug because NASD found Toth's U4 misstatements to be "willful," and that makes all the difference in the world.
Securities Exchange Act, Section 3(a)(39) deems Toth statutorily disqualified because he
willfully made or caused to be made in any application …to become associated with a member …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 application …any material fact…
Accordingly, under Article III, Section 3(b) of NASD's By-Laws, a "statutorily disqualified" person cannot become or remain associated with an NASD member unless the disqualified person's member firm applies for relief from the statutory disqualification under Article III, Section 3(d) of the By-Laws.
It's an old tale and an old lesson. When in doubt disclose, disclose, disclose. Or, as I often counsel my clients, the "asterik" is your best friend. If you're not sure whether to disclose something, you can always asterik the question and provide your explanation. Of course, even better, hire a lawyer to analyze your problem. Hey, I can always use the business.