Barred Stockbroker Seeks Approval As a Mortgage Loan Originator

February 16, 2012

It happens every day on Wall Street. At Merrill Lynch, JP Morgan, Morgan Stanley, UBS, Wells Fargo, Citigroup, and at smaller organizations. A registered person gets in trouble. Their status as a human being is suddenly altered to that of a "Defendant" or "Respondent." Of course, quite often, a stockbroker or trader is in trouble because they have changed some other human being's status to that of "Victim." So - no, I'm not writing this column to seek your sympathy for those on the Street who have strayed.  On the other hand, not every person in the biz who runs afoul of a regulator or prosecutor is guilty.

In response to becoming the subject of a criminal or regulatory case, an individual's response is fairly limited:

  • fight it to the bitter end,
  • settle and cut your losses, or
  • tell ‘em to go to Hell and default.

Which path one opts for is often determined by the facts of the case, and one's ability to tolerate large amounts of stomach acid and what may feel like the crushing chest pains of a heart attack.

There are consequences to engaging in violations of securities laws, rules, and regulations and there are consequences to how you resolve the charges against you.  Sometimes you walk away from the mess with what industry professionals call a "ding" on your record: a fine or a suspension.  Depending upon the size of the fine or length of the suspension, you may simply shrug your shoulders and feel lucky at having dodged a bullet, or you may feel quite a bit of personal and career pain.  For those who wind up with the securities industry's equivalent of capital punishment: the Bar, the consequences are often far greater than anticipated.

Around the office water cooler, one of the most erroneous myths of Wall Street regulation and prosecution is that being barred from the industry is the end of it - pack up your bags, empty your locker, and put it all behind you. Time to get on with the rest of your life. Time to move on. To that extent, a fairly accurate assessment but for the fact that it doesn't quite end as you exit your former firm and hit the pavement seeking a new career and a new job.

The longer term impact of a Bar stretches beyond the confines of the securities industry. If you need a fidelity bond, say for a job as a security guard, you might be declined.  If you want to pursue a licensed career in another profession, some agencies will refuse your application.  And that's on top of all the polite smiles and pats on the back as an interviewer learns of your record and gives you the bum's rush out the door.

Case in Point

Charles DaCruz filed a petition in New York State Supreme Court seeking to annul  the New York State Banking Department's ("NYSBD's") October 4, 2011 denial of his application for a Mortgage Loan Originator ("MLO") license. In the Matter of DaCruz v Banking Dept. of the State of N.Y., 2012 NY Slip Op 30255(U), Dkt. No. 106833/11, (Supreme Court, New York County, February 1, 2012).

NASD Proceedings

During the NYSBD's evaluation of DaCruz's MLO application, consideration was given to a 2004 NASD regulatory Complaint against DaCruz, which alleged misconduct that purportedly occurred from October 1, 1998, until approximately June 30, 1999. An NASD Hearing Panel held a six-day hearing in late 2004 and early 2005, during which DaCruz testified on his own behalf, was represented by counsel and had the opportunity to cross-examine witnesses.

In September 2005, the NASD Hearing Panel found DaCruz had guilty of failing to disclose to his customers the compensation that he had earned from the sale of Natural Health Trends Corporation ("NHTC") stock.  Also, the NASD Panel found that he had made baseless price predictions related to NHTC. The Panel imposed a $67,000 fine, a requalification as a general securities representative, and a one-year suspension.

DaCruz appealed to the NASD's National Adjudicatory Council ("‘NAC"), which issued a Decision on January 3, 2007, affirming his guilt, imposed a $67,000 fine in the form of disgorgement, and modifying the one-year suspension to a Bar in all capacities in consideration of the need for future protection of customers.  Clearly, this may have been a situation where DaCruz should have left the Hearing Panel's ruling undisturbed - it turned out to be a very costly appeal that upped the one-year suspension into a full blown Bar.

NYSBD Review of NASD Decision

In reviewing the NASD proceedings, NYSBD noted that the self-regulatory organization had characterized DaCruz's misconduct as "egregious." Further, NYSBD considered the "voluminous" nature of the transactions at issue and the NASD's findings that DaCruz had:

  • engaged in sales practices violations over an extended period of time;
  • obtained a sizable monetary benefit
  • willingly accepted the sales incentives and  provided baseless predictions to his customers; and
  • totally ignored his fair-dealing obligation to his customer.

New Jersey Bureau of Securities

As I noted in the preamble to this article, little involving Wall Street's regulation occurs in a vacuum.  Among the consequences of the NASD'sDecision was that it prompted a review by the New Jersey Bureau of Securities (the "NJBS").  Based upon its review of the self regulator's case and a finding that the public interest required further action, NJBS issued a February 26, 2007 Summary Revocation Order (the "Order") revoking DaCruz's registration as an agent with any NASD broker-dealer. In addition to basing its order on the fact that DaCruz was the subject of NASD's bar, the Bureau also found that the misconduct cited by NASD constituted dishonest or unethical securities industry business, constituting good cause for the revocation. In reviewing DaCruz's MLO application, NYSBD fully considered the NJBS Order.


In addition to considering NASD's and NJBS's  decisions and orders, NYSBD reviewed the circumstances of an NASD arbitration proceeding in which DaCruz and others were found jointly and severally liable for approximately $56,781 following allegations of breach of contract, breach of fiduciary duty, misrepresentation, fraud, and violations of multiple securities laws and regulations. Apparently, DaCruz had settled for $5,000 a claim that related to the events underlying the above-noted NASD case.

Similarly, NYSBD reviewed FINRA documentation that indicated that a complaint was received alleging unauthorized trades, inappropriate use of margin and lack of diversification in account. The matter apparently settled for $20,000, of which DaCruz contributed $10,000.

In another instance of a customer complaint, this one involving an allegataion that a "client's mental faculties were taken advantage of," DaCruz has personally contributed $75,000 towards a $150,000 settlement.

Finally, in 2005, a customer initiated an arbitration claim against DaCruz alleging breach of contract, breach of fiduciary duty and misrepresentations. DaCruz apparently indicated that he "may have contributed $2,500" to a $5,000 settlement of this claim.

NYSBD's Balancing Test

In evaluating DaCruz's MLO application, NYSBD had to perform a balancing act.

What, if any, weight should the division afford to the applicant's regulatory history - which, frankly, was not relatively recent in terms of the dates during which the NASD violations were found to have occurred.

How should settlements of customer complaints be viewed?  There were no findings of liability against DaCruz but was there a troubling, consistent pattern of abuse?

Ultimately, when NYSBD reviewed DaCruz's MLO application in 2011, that division had to decide whether his NASD violations from as far back as 1998 were still indicative of his character - and what about the more recent settlements, as recent as 2005? Had DaCruz paid the price of a securities industry Bar and should be permitted to get on with his life?

In considering the relative weight and impact of the alleged prior incidents, NYSBD noted that having been born in 1971, DaCruz was "fully an adult in 1998 and 1999 when he engaged in the misconduct described above."  As I see, it, that's fair - we're not dealing with a kid at that time.  When he engaged in the misconduct, DaCruz was in his late 20s - still, he's now in his 40s and those events were half a lifetime ago.  In addressing such concerns, NYSBD noted that

[D]espite the misconduct occurring approximately twelve years ago, the NAC's decision was issued in 2007, thereby indicating that despite the passage of time, petitioner's misconduct was deemed to be so serious that petitioner's original one-year suspension was increased to a complete bar. . ."

Additionally, the NYSBD considered information provided by DaCruz to demonstrate his purported good conduct and rehabilitation. Such information included, among other things, letters of recommendation from multiple customers for whom DaCruz had served as a loan officer or mortgage specialist and September 29, 2010, letter, which stated that during more than three years in the mortgage industry, he had never received a complaint from a borrower. Notwithstanding, the NYSBD did not find that such factors outweighed the evidence of extensive customer abuse during his Wall Street career or the explicit concerns regarding potential future abuse.

Appeal of NYSBD Denial

All of which prompted DaCruz to appeal to the New York State Supreme Court. That initial petition was withdrawn without prejudice to permit an additional review by NYSBD, which resulted in that same conclusions and denial, leading to an Amended Notice and Petition on November 14, 2011. The stage was now set for a court to step in and balance the scales of justice, one way or the other.

Regardless of whether one agrees with DaCruz's assertions, we are presented with an interesting challenge.  At what point are events in our past so far removed from the present day as to no longer fairly reflect our character? Similarly, at what point do we have sufficient comfort and assurances that an individual with a regulatory history that resulted in an industry bar is rehabilitated to the degree that the public is no longer at risk if he is licensed to serve them in a position of trust?

Rational, Arbitrary and Capricous

In ruling to dismiss DaCruz's petition and to sustain the NYSBD's denial, the Court held that:

It was rational for the NYSBD to determine that petitioner's conduct amounted to a showing of a lack of character and general fitness for an MLO license.

While petitioner asserts that the amount of time that has elapsed between his misconduct and his application for an MLO license should mitigate, if not override, the seriousness of his actions, this argument is without merit. It was rational for the NYSBD to decide that although some time had passed between petitioner's egregious misconduct and his application for an MLO license, there remained concerns about petitioner's conduct in the future. Furthermore, while New York State adheres to a policy of fair treatment of rehabilitated offenders, it was rational for the NYSBD to determine that petitioner was unfit to receive an MLO license as the Legal Division found that there was a direct relationship between petitioner's demonstrated character and fitness and the license sought. . .

Bill Singer's Comment

Frankly, a fascinating and provocative case - from its roots in the 1990s up until the Court's 2012 ruling. As I said earlier, there are consequences to misconduct on Wall Street.  The lapse in judgement, the regulatory short-cut, the who's gonna find outforgery, often have legs.  And those legs will follow you not for a few months or years but possibly for decades.  What you thought was a minor hiccup may haunt you for the rest of your life.

Industry professionals likely view DaCruz far differently than public customers or regulators.

For the former, the facts may present a stale case, the over zealous puffery of a kid in his late 20s caught up in the frenzy of the tech bubble of the '90s. Hey, NASD barred him, it was in the last century, he's in a new line of work, he's kept his nose clean, give him a second chance.

Yet a second chance at redemption for some is a troubling opportunity for mayhem for others.  To that extent, we expect regulators such as the NYSBD to err on the side of protecting the public.

To be objective, the outcome here could easily have gone the other way.  It would not have been surprising for the NYSBD or the Court to have concluded that the earlier DaCruz was a young man who paid a significant price for his violations, had learned a valuable lesson, and stayed on the straight and narrow ever since - let him have the MLO.

That didn't happen.

Maybe if the case wound up before a different NYSBD examiner or a different judge on a different day, DaCruz would now have his MLO.  Who knows?  Regardless, if you're a Wall Street registered person and you feel the temptation to circumvent the rules, re-read this case, and if you're still not convinced, re-read it again.  You may not understand the full cost of getting caught.