In and out. On and off. Registered and unregistered. There are points and counterpoints to many things in life and on Wall Street. There are things that you can do when unregistered that do not require any regulatory disclosures; but, should you return to the industry in a registered capacity, those past acts may require a current disclosure. Sometimes, things may slip your mind and you commit an inadvertent violation; other times, a regulator may not be convinced that your omission was simply caused by forgetfulness or misunderstanding. The difference between an inadvertent and an intentional nondisclosure may be the difference between staying in the business and being tossed to the curb. See how this all comes together in a recent FINRA settlement.Case In PointIn response to the filing of a Complaint on June 21, 2016, by the Department of Enforcement of the Financial Industry Regulatory Authority ("FINRA"), Respondent Steven Mark Newman submitted an Offer of Settlement dated September 14, 2016, which the regulator accepted. Under the terms of the Offer of Settlement, without admitting or denying the allegations in the Complaint, Respondent Steven Mark Newman consented to the entry of findings and violations, and to the imposition of the sanctions. FINRA Department of Enforcement, Complainant, vs Steven Mark Newman, Respondent (Order Accepting Offer of Settlement, FINRA Office of Hearing Officers, 2014040883401, September 19, 2016) (the "Order").The Order asserts that Newman first became registered in 2004 and by May 2014, he was registered with FINRA member firm E*TRADE, where he remained until that firm filed a Uniform Termination Notice for Securities Industry Registration ("Form U5") on July 2, 2014.
SIDE BAR: Online FINRA BrokerCheck records as of September 27, 2016, disclose the following registration history for Newman:Sportspicks.comThe Order asserts that in June 2012, Newman bought the internet domain name "Sportspicks.com" for approximately $25,600 and that sometime in March 2013 he took undescribed steps to launch Sportspicks.com as a:
- Integrity Trading, Inc.: July 2004 to December 2004;
- TD Ameritrade, Inc.: June 2005 to November 2012; and
- E*TRADE Securities LLC: May 2014 to July 2014
[B]usiness that would: provide sports handicapping information to its subscriber base; run sports contests for profit; and work with other third party businesses to generate additional revenue.Investor JHAlso round March 2013, Newman allegedly recommended that a former brokerage customer of his (identified in the Order only as "JH") invest in Sportspicks. Around April 2013, JH invested $50,000 in Sportspicks in exchange for a 50% ownership of the company. Allegedly, Newman offered to give JH a capital distribution four times a year in exchange for his investment if Sportspicks was profitable. Following JH's investment, Newman and another partner each retained a 25% ownership interest in Sportspicks. The Order asserts that on April 10, 2013, Newman incorporated Sportspicks in Texas; designated himself as the registered agent and manager; and used his home address as the company's mailing address. Thereafter, through April 2014, Newman purportedly attempted to expand and manage the company.700 PlusAlso in April 2013, Newman allegedly obtained a 5% ownership interest in 700 Plus Credit National, LLC ("700 Plus"), a company that purported to provide customers with credit repair services. Thereafter, 700 Plus's filings designated Newman as a "Managing Member." During this time period, Newman allegedly recommended that JH also invest in 700 plus, which the former customer did to the tune of some $325,000 in exchange for a 25% ownership interest. JH Lawsuit The Order alleges that around February 28, 2014, investor JH filed a civil lawsuit against Newman in Texas state court seeking at least $50,000 in damages plus punitive damages. That Civil Complaint alleged that Newman had engaged in fraud, conversion, violation of the Texas Theft Liability Act and breach of contract in connection with Newman's efforts to induce JH's investment in Sportspicks.com LLC and another unspecified "business activity." The Civil Complaint alleged that Newman had represented to JH that Sportspicks and the other business had been in existence for many years and was profitable. The Civil Complaint asserted that, in fact, Sportspicks had only been incorporated the day before JH invested in the business, was not profitable and had never done any relevant business historically.On March 6 and 23, 2015 (dates when Newman was still NOT associated with any FINRA member firm), JH amended his Civil Complaint to add allegations concerning 700 Plus (apparently the other "business activity" referenced in the initial Civil Complaint). The Amended Civil Complaint asserted that Newman had fraudulently induced JH into the 700 Plus investment by claiming that the investments would have a much greater rate of return than his present investments and be safe. Newman Joins E*TRADEAn important aspect of this case concerns the periods of time when Newman was and was not registered with a FINRA member firm and, as such, subject to FINRA rules. Pointedly, online FINRA BrokerCheck records (as more fully noted above) assert that Newman was unregistered sometime around November 2012 through sometime around May 2014, a period of about 1 1/2 years.The Order asserts that on April 28, 2014, the date when Newman had become associated with E*TRADE, he had already received a copy of the Civil Complaint and had filed an Answer (which he had signed around March 26, 2014). Notably, at the time of his E*TRADE employment, Newman was Sportspick's registered agent, manager and an owner; and 700 Plus's 5% owner and still designated as a "Managing Member."Item 14I on the Form U4The Form U4 has a detailed section 14I, which provides for the following disclosures:
Customer Complaint/Arbitration/Civil Litigation Disclosure
14I. (1) Have you ever been named as a respondent/defendant in an investment-related, consumer-initiated arbitration or civil litigation which alleged that you were involved in one or more sales practice violations and which:
(a) is still pending, or;(b) resulted in an arbitration award or civil judgment against you, regardless of amount, or;(c) was settled, prior to 05/18/2009, for an amount of $10,000 or more, or;(d) was settled, on or after 05/18/2009, for an amount of $15,000 or more?
(2) Have you ever been the subject of an investment-related, consumer-initiated (written or oral) complaint, which alleged that you were involved in one or more sales practice violations, and which:
(a) was settled, prior to 05/18/2009, for an amount of $10,000 or more, or;(b) was settled, on or after 05/18/2009, for an amount of $15,000 or more?
(3) Within the past twenty four (24) months, have you been the subject of an investment-related, consumer-initiated, written complaint, not otherwise reported under question 14I(2) above, which:
(a) alleged that you were involved in one or more sales practice violations and contained a claim for compensatory damages of $5,000 or more (if no damage amount is alleged, the complaint must be reported unless the firm has made a good faith determination that the damages from the alleged conduct would be less than $5,000), or;(b) alleged that you were involved in forgery, theft, misappropriation or conversion of funds or securities?
Answer questions (4) and (5) below only for arbitration claims or civil litigation filed on or after 05/18/2009. (4) Have you ever been the subject of an investment-related, consumer-initiated arbitration claim or civil litigation which alleged that you were involved in one or more sales practice violations, and which:
(a) was settled for an amount of $15,000 or more, or;(b) resulted in an arbitration award or civil judgment against any named respondent(s)/defendant(s), regardless of amount?
(5) Within the past twenty four (24) months, have you been the subject of an investment-related, consumer-initiated arbitration claim or civil litigation not otherwise reported under question 14I(4) above, which:
The Order asserts that Newman wrongly answered "NO"on his April 30, 2014, initial Form U4 to Questions 14I(1)(a); 14I(5)(a); and 14I(5)(b) in violation of Article V, Section 2(c) of FINRA's By-Laws, FINRA Rule 1122 and FINRA Rule 2010. FINRA deemed Newman's nondisclosure of the Civil Complaint to be "willful."(a) alleged that you were involved in one or more sales practice violations and contained a claim for compensatory damages of $5,000 or more (if no damage amount is alleged, the arbitration claim or civil litigation must be reported unless the firm has made a good faith determination that the damages from the alleged conduct would be less than $5,000), or;(b) alleged that you were involved in forgery, theft, misappropriation or conversion of funds or securities?
FINRA Conduct Rule 3270: Outside Business Activities of Registered PersonsNo registered person may be an employee, independent contractor, sole proprietor, officer, director or partner of another person, or be compensated, or have the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm, unless he or she has provided prior written notice to the member, in such form as specified by the member. Passive investments and activities subject to the requirements of NASD Rule 3040 shall be exempted from this requirement.*** Supplementary Material ***01 Obligations of Member Receiving Notice. Upon receipt of a written notice under Rule 3270, a member shall consider whether the proposed activity will: (1) interfere with or otherwise compromise the registered person's responsibilities to the member and/or the member's customers or (2) be viewed by customers or the public as part of the member's business based upon, among other factors, the nature of the proposed activity and the manner in which it will be offered. Based on the member's review of such factors, the member must evaluate the advisability of imposing specific conditions or limitations on a registered person's outside business activity, including where circumstances warrant, prohibiting the activity. A member also must evaluate the proposed activity to determine whether the activity properly is characterized as an outside business activity or whether it should be treated as an outside securities activity subject to the requirements of NASD Rule 3040. A member must keep a record of its compliance with these obligations with respect to each written notice received and must preserve this record for the period of time and accessibility specified in SEA Rule 17a-4(e)(1).
(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.