Private Securities Transactions And Tax Liens Trip Stockbroker

June 13, 2014

You're a stockbroker. You're trying to make a little sumthin' on the side and you come across this enhanced CD product with a 9% return. All ya gotta do is provide sales leads. Which you do. And you get paid. And then it turns out that what you were introducing folks into wasn't exactly what you thought it was. And then there's some legal action. And then FINRA comes a callin'. Ah yes, life on Wall Street!

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, Joseph Eugene Ayers submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Joseph Eugene Ayers, Respondent (AWC  2013038634101, May 30, 2014).

Ayers was first registered in 1997 and from 2005 to August 2010, he was registered with FINRA member firm Nationwide Securities, LLC, from June 5, 2005, to August 10, 2010; and, thereafter, with Invest Financial Corporation from April 21,2011, to October 21,2013. 

The AWC alleges that on April 6, 2010, while registered with Nationwide, that Ayers signed an "Independent Contractor Agreement" with a non-FINRA-member. Under the terms of the Agreement, Ayers was to provide sales leads to the non-member.

Taking Notes

The AWC asserts that the non-member company sold promissory notes (the "Notes") to investors in connection with a program of offering "enhanced CD products," which promised a 9% return on a 12-month term for investments exceeding $200,000. The Notes were falsely represented as having been filed with the Securities and Exchange Commission; in fact, not only were the Notes not registered but they were not subject to any registration exemption.

The AWC asserts that on April 20, 2010, one of Ayers's Nationwide customers (introduced by Ayers to the non-member) invested $500,000 in two Notes. As fate would have it, on that same day, the Pennsylvania Securities Commission issued a "Summary Order to Cease and Desist" against the non-member and its two owners.

On April 29, 2010, the non-member paid to Ayers a $7,500 finder's fee as compensation for the referral.


The AWC asserts that the cited Notes transaction constituted a "private securities transaction" in violation of NASD Rule 3040 and 2010 because Ayers failed to provide Nationwide with prior written notice adequately describing the proposed transaction and his proposed role. Further, Ayers was cited for failing to disclose to Nationwide whether he had received or may receive selling compensation in connection with the transaction.

Lien And Mean

In January 2009, the United States Internal Revenue Service filed a $34,335 judgment lien against Ayers. 

In May 2010, the Pennsylvania Department of Revenue filed a $6,545 judgment lien against Ayers. 

The AWC asserts that Ayers promptly learned of the existence of both liens but failed to disclose them on his Uniform Application For Securities Industry Registration Or Transfer ("Form U4") within the required 30 days.

Ticking Clock of Disclosure

Article V of FINRA's By-Laws: Registered Representatives and Associated Person, provides as follows:

Application for Registration

Sec. 2.  (a) Application by any person for registration with the Corporation, properly signed by the applicant, shall be made to the Corporation via electronic process or such other process as the Corporation may prescribe, on the form to be prescribed by the Corporation and shall contain:
(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
(2) such other reasonable information with respect to the applicant as the Corporation may require.

(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.

(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. 

In addition to the above By-Law provision, 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.

Finally, the Form U4 asks the following:

Financial Disclosure

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?

14M. Do you have any unsatisfied judgments or liens against you?

Time Flies

It was not until April 21, 2011, when Ayers was then registered with Invest Financial, that he amended his Form U4 to disclose the 2009 IRS and 2010 Pennsylvania tax liens. The AWC deemed those untimely disclosures to constitute violations of FINRA Rules 1122 and 2010 and Article V, Section 2(c), of FINRA's By-Laws.

The AWC asserts that on October 14, 2013, Nationwide filed an Amended Form U5 in which the firm reported that a former customer had filed a September 2013 arbitration claim alleging misconduct by Ayers.

The Cost

In accordance with the terms of the AWC, FINRA imposed upon Ayers a $30,000 fine and a one-year suspension in all capacities from associating with any member firm.