Statutory Disqualification for Undisclosed Tax Liens Sustained by FINRA, SEC, and Federal Court

February 21, 2012

In Mathis v. U.S. Securities & Exchange Commission (10-429, 2nd Circuit, February 14, 2012), Petitioner Scott Mathis sought the review of a Securities and Exchange Commission ("SEC") Order that affirmed sanctions imposed by the Financial Industry Regulatory Authority ("FINRA") that subjected Mathis to statutory disqualification for, among other things, failing to disclose that certain tax liens had been filed against him by the Internal Revenue Service ("IRS"). Finding that the SEC's actions were supported by substantial evidence that Mathis had intentionally failed to disclose on registration forms the existence of the liens, the Circuit Court affirmed the SEC's Order. 


From 1985 through 2002, Mathis worked in the securities industry as a broker or principal with various brokerage firms.  In September 1995, Mathis started as a broker with The Boston Group LP, a FINRA member, and signed and filed a the "Uniform Application for Securities Industry Registration or Transfer," ("Form U4").  Following the 1998 dissolution of the Boston Group LP, Mathis associated with the National Securities Corporation  ("National Securities") as a broker and principal but was not required to submit a new U4. 

In June 2000, Mathis became associated with InvestPrivate, Inc., a broker-dealer he founded and controlled, and submitted his second Form U4. Concurrently, he served as the chief executive officer and chairman of the board of directors of, Inc. ("CelebrityStartUps"), a development-stage company he founded. On August 21, 2000, Mathis signed a third Form U4 to register as a representative and principal with CelebrityStartUps.   

The Tax Liens 

In separate written notices between August 1996 and September 2002, IRS informed Mathis that it had entered against  him five unsatisfied tax liens totaling $634,436.28:  
  1. a $274,526.68 lien entered August 9, 1996, in connection with his unpaid taxes for 1993 and 1994;  
  2. a $53,302.53 lien entered September 23, 1998, in connection with unpaid taxes for 1995; 
  3. a $179,429.07 lien entered May 11, 1999, in connection with his unpaid taxes for 1997; 
  4. a $92,985.14 lien entered July 2, 2002, in connection with unpaid taxes for 1999; and 
  5. a $34,192.86 lien entered September 9, 2002, in connection with  unpaid taxes for 2000. 
 U4 Disclosure of Tax Lien 

During the relevant times when Mathis filed his Forms U4, that document contained an item that asked:   Do you have any unsatisfied judgments or liens against you?   

Mathis's Forms U4 did not contain an affirmative disclosure of the existence of the various IRS tax liens noted above on the two Forms U-4 that he filed in 1999 and 2000.  Similarly, he failed timely to amend the 1995 Form U4 to reflect those liens, and failed to amend the 1999 or the 2000 forms to reflect the July 2002 and September 2002 Tax Liens.   

On both the 1999 and 2000 Forms U-4, for example, Mathis responded "no" to the question  Similarly, on an Annual Representative Certification for National Securities, dated January 19, 1999, Mathis claimed that he had "paid all federal, state, and local taxes due in full," and denied having "any liens . . . entered  against you, which were not previously disclosed on Form U-4."   

FINRA Investigates 

By letter dated July 3, 2003, FINRA asked Mathis to explain his failure to disclose the five federal tax liens. The letter prompted Mathis to disclose the liens for the first time on an amended Form U-4, which he filed eleven days later. Mathis paid the liens approximately one month after disclosing them, and the IRS released the liens a few months thereafter.  

Initially, Mathis claimed to FINRA that "to the best of [his] recollection, [he] was not aware of the pendency of any federal tax liens at such times and further was not aware of any  obligation to report such matters on Form U-4." Thereafter, during an August 2003 on-the-record interview with FINRA, Mathis acknowledged his receipt of the  five IRS notices, but advanced several other explanations for his failure to disclose the liens, among which were relying upon the advice of a Boston Group colleague and former FINRA official, Kye Hellmers, whose understanding was "that if matters were not directly related to the securities industry, they need not be reported on the Form U4.   

SIDE BAR: An online biography from offers this background on Hellmers:   

From March 1973 to September 1992 Mr. Hellmers was employed by the NASD (n/k/a FINRA). During this period, he worked in various capacities in the New York and Washington DC offices of the company including Supervisor and Assistant Director. In June 1982 Mr. Hellmers was promoted to District Director of the Los Angeles District Office and in 1991 was again promoted to Vice President.   

FINRA Hearing 

In February 2005, FINRA's Division of Enforcement filed a multi-count complaint against Mathis that charged him, as relevant to this appeal, with willfully failing to amend his Form U-4 to disclose the liens, and willfully failing to disclose the tax liens on the two Forms U-4 filed in 1999 and 2000, when he started InvestPrivate and CelebrityStartUps. Mathis denied the charges and requested a hearing before a FINRA Hearing Panel, which was held in July 2007 and lasted for two days.   

Essentially, Mathis's defense was that any omissions were caused by his lack of awareness that he had a duty to amend his previously filed 1995 Form U4 to reflect the existence of the liens from 1996 and thereafter.  He characterized any misstatements as being inadvertent and based upon a mistaken understanding of his obligations, rather than a premeditated, intentional, and willful omission.  

SIDE BAR: Why the big stink over whether Mathis intentionally/willfully or inadvertently engaged in the cited omissions about the liens on his Forms U4?  Frankly, it's a stark and critical distinction.   

According to §§ 3(a)(39)(F) and 15A(g)(2) of the Exchange Act, 15 U.S.C. §§ 78c(a)(39)(F) and 78o-3(g)(2), a finding of wilffulness would subject Mathis to a "statutory disqualification," or bar, from associating with any FINRA member firm - and such a bar is set in motion notwithstanding that a FINRA Hearing Panel merely imposed a monetary fine and/or a lesser suspension.   

Pro se respondents or inexperienced defense lawyers frequently fall into the trap of agreeing to settle a Form U4 non-disclosure allegation for a modest fine and suspension - not realizing that when they agreed to a finding of "willful" non-disclosure that in addition to the fine and suspension, the respondent would be deemed disqualified from securities industry association (and, by extension, possibly to other endeavors).   

For further explanation and examples, Statutory Disqualification ( at   

The FINRA Hearing Panel found that Mathis "made a conscious effort to conceal his tax liabilities from his [new] employer" by falsely representing on the National Securities January 1999 Annual Certification that he was current in his taxes. Specifically, the Opinion states:   

Respondent violated Rule 2110 and IM-1000-1 by willfully failing to provide material information on his Form U4. For his failure to disclose tax liens, Respondent is suspended from associating with any member firm in any capacity for three months and fined $10,000, payable upon re-entry into the industry. For his failure to disclose customer complaints, Respondent is suspended from associating with any member firm in any capacity for ten business days and fined $2,500, payable upon re-entry into the industry.   

The FINRA Hearing Panel imposed a $10,000 fine and a three-month suspension for failing to disclose the tax  liens on his Forms U-4 after January 1999.   

NAC Appeal 

Mathis appealed the FINRA Hearing Panel's decision to the FINRA National Adjudicatory Council (the  "NAC"). In a decision issued in December 2008, the NAC largely affirmed the Hearing Panel's decision, but disagreed with its finding that Mathis had reasonably relied on Hellmers's advice from 1996  to January 1999. The NAC found that Hellmers had offered only his opinion about Mathis's obligation to report the liens, and that the former FINRA official had specifically advised Mathis that it was the responsibility of The Boston Group's compliance department to determine if an unsatisfied tax lien should be reported.   Further, the NAC advised that:   

We therefore modify the Hearing Panel's finding that Mathis's failure to amend his Form U4 prior to January 1999 was not willful. We find instead that, by a preponderance of the evidence, Mathis willfully failed to amend his Form U4 from the time he received notice of the First Tax Lien in August 1996 . . .   In light of our findings that Mathis's failures to disclose the tax liens were willful, Mathis is statutorily disqualified. . .   

SEC Appeal 

Following the NAC decision, Mathis appealed to the SEC.   

Mathis did not challenge FINRA's finding that he failed to timely amend his Form U-4 to disclose the five tax liens or the self regulator's finding that he failed to disclose pending tax liens on the two Forms U-4 filed in 1999 and 2000. Mathis's  petition largely focused in on the NAC's finding of willfulness and his contention that the resulting statutory disqualification was an excessive sanction.   

Unpersuaded by Mathis's contentions, on December 7, 2009, the SEC sustained the NAC finding that he had "voluntarily provided false answers on his Form U4" regarding the tax liens and that the nondisclosure was material. In explaining its working definition of "willfulness" the SEC noted that it was sufficient to show that a respondent intentionally committed the act as charged and does not require that the respondent be aware that he is violating industry rules, regulations, or laws.   

2nd Circuit Appeal 

Mathis petitioned the Second Circuit to review and vacate the SEC's order, to the extent that he was subject to statutory disqualification.  In his appeal, Mathis sought consideration that he had justifiably relied upon Hellmers' advice because the latter was a former FINRA official with suitable experience, position and knowledge. As FINRA and the SEC below had found, the Court rejected that position on similar grounds. Similarly, as to the core issue of what constitutes willful misconduct in connection with failing to disclose a material event on a Form U4, the Court cited Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965), the Court rejected Tager's argument that  

the broker must have understood that he was violating a particular rule in order to be found to have willfully violated that rule. In doing so, we explained that "[i]t has been uniformly held  that ‘willfully' in this context means intentionally committing the act which constitutes the violation. There is no requirement that the actor also be aware that he is violating one of the Rules or Acts. . .  

Bill Singer's Comment

I have often written about the consequences of tax liens on a registered person's career.  In the aftermath of the Great Recession, many employees of Merrill Lynch, JP Morgan, Morgan Stanley, and similar behemoths found themselves financially underwater, as did their counterparts at regional and indie firms such as LPL or Schwab. 

An oddity of this case is set forth in Footnote 2 of the OHO Decision: 

On May 12, 2004, the Department of Enforcement ("Enforcement") filed a fourteen count complaint against Respondent Scott Mathis and several other respondents.²   

FN2: When the Complaint was filed, FINRA issued a press release entitled "NASD Charges InvestPrivate, Inc.and its Chairman [Scott Mathis] with Fraudulently Raising Millions." Several years later, FINRA withdrew all allegations of fraudulent misconduct without explanation. At the Hearing, Respondent noted that FINRA's press release, alleging that Respondent engaged in a massive fraud, remained on FINRA's website without any clarification or subsequent history showing that the fraud allegations were withdrawn.Respondent asked the Panel to rectify this. While the Panel does not have the authority to direct FINRA staff to remove the press release or append it with clarifying information, the Panel encourages FINRA to consider taking action so that people reading the press release on FINRA's website do not have the mistaken impression that FINRA continues to allege that Respondent engaged in fraudulent conduct. 

In addition to citing this press release at FINRA, Mathis raised that document during his appeal to the SEC.  In its Opinion (pages 16-17), the SEC considered Mathis's position: 

Mathis charges that the issuance of an NASD press release in this matter caused "enormous" harm to his career and reputation. Following the issuance of the original complaint against Mathis, NASD issued a press release entitled "NASD Charges InvestPrivate, Inc. and its Chairman [Scott Mathis] with Fraudulently Raising Millions." The press release also disclosed the allegations pertaining to Mathis's tax liens. Mathis asserts that, "[t]hereafter, the press release was maliciously emailed to every InvestPrivate customer by a disgruntled former InvestPrivate employee." 

As noted, NASD subsequently withdrew all allegations of fraudulent misconduct. At the NASD hearing, Mathis asserted that he suffered harm as a result of the press release remaining on NASD's website without any indication that the fraud charges had been withdrawn. In response to Mathis's request that the situation be rectified, the Hearing Panel noted that, while it did not have "the authority to direct [NASD] staff to remove the press release or append it with clarifying information," it nevertheless, "encourage[d] [NASD] to consider taking action so that people reading the press release on [NASD's] website do not have the mistaken impression that [NASD] continues to allege that Mathis engaged in fraudulent conduct." After issuance of the Hearing Panel's decision, the press release on NASD's website was modified to include the following notice: "NASD withdrew the fraud charges against InvestPrivate, Inc., Mathis, [and others]."37 The NAC dismissed Mathis's contention that he should not have been sanctioned because of the harm he sustained as a result of the press release. The NAC noted that the statements in the press release were accurate and concluded that, in any event, publication of the information in the press release was not a mitigating factor for purposes of sanctions. We concur that the press release, which was accurate when issued, and is now accurate as updated, is not a mitigating factor for purposes of determining Mathis's sanction. 

Mathis contends that the fact that NASD continued with the case after the fraud charges were withdrawn suggests NASD had an agenda or bias against him. To the extent that Mathis is alleging that he has been subject to unlawful selective prosecution in NASD's initiation and pursuit of this action against him, Mathis must prove that he was singled out for enforcement action while others similarly situated were not and that his selection as a target for enforcement was based on an unjustifiable consideration such as his race, religion, national origin, or the exercise of constitutionally protected rights.38 Mathis has made no showing on the record before us that he has been subject to such improper prosecutorial decisions.