In a recent FINRA Acceptance, Waiver and Consent regulatory settlement, it was alleged that despite the fact that the Respondent registered representative was aware that he had been charged with two felonies, and, further, that he had discussed those charges with his brokerage firm's supervisors, he did not timely amend his Form U4 to disclose the charges. FINRA did not allege that the non-disclosures were willful. That's great news for the rep. Unfortunately, for those who labor in the industry's compliance departments and render legal services, FINRA's benevolence doesn't make sense in light of the fact pattern. Some explanation by the self-regulatory-organization was warranted. None was forthcoming.
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, Thomas J. Tedeschi submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted.
In the Matter of Thomas J. Tedeschi, Respondent (FINRA AWC 2021071925001)
The AWC asserts that Thomas J. Tedeschi was first registered in 1994 with Spartan Capital Securities, LLC.
SIDE BAR: Online FINRA BrokerCheck disclosures as of May 22, 2023, disclose that Tedeschi, who is denoted as no longer being registered, had "27 Years of Experience" at "18 Firms." As reported on BrokerCheck, it appears that about 8 of the 18 FINRA member firms where Tedeschi was registered were "expelled" by FINRA.
The "Background" portion of the AWC alleges in part that [Ed: footnote omitted]:
On September 30, 2016, FINRA suspended Tedeschi for failing to comply with an arbitration award or settlement agreement, or to satisfactorily respond to a FINRA request to provide information concerning the status of his compliance. The suspension was lifted on October 6, 2016.
2019 Felony Charges
As alleged in part in the AWC:
In late March 2019, while associated with Spartan Capital, Tedeschi was arrested and charged in Nassau County, New York with Criminal Sale of a Controlled Substance in the Third Degree and Criminal Possession of a Controlled Substance in the Third Degree, both Class B felonies. Tedeschi ultimately pied guilty to a reduced misdemeanor charge of criminal possession of a controlled substance.
Tedeschi was aware that he had been charged with two felonies and he discussed the charges with supervisors at Spartan in April 2019. However, Tedeschi did not amend his Form U4 within 30 days to disclose the charges, as he was required to do. Indeed, Tedeschi never disclosed the felony charges on his Form U4 prior to his resignation from Spartan.
By failing to disclose the felony charges on his Form U4, Tedeschi violated Article V, Section 2(c) of FINRA's By-Laws, and FINRA Rules 1122 and 2010.
In accordance with the terms of the AWC, FINRA imposed upon Reilly a $5,000 fine and a three-month suspension from associating with any FINRA member in all capacities.
Criminal Disclosure14A.(1) Have you ever:(a) been convicted of or pled guilty or nolo contendere ("no contest") in a domestic, foreign, or military court to any felony?(b) been charged with any felony?. . .
Charged: Means being accused of a crime in a formal complaint, information, or indictment (or equivalent formal charge).
Q3: If a registered person is arrested but not charged with a crime, is the arrest required to be reported?A: No. An arrest without a charge is not required to be reported. (02/13/98)
(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.
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.
(a) Each member shall promptly report to FINRA, but in any event not later than 30 calendar days, after the member knows or should have known of the existence of any of the following:(1) the member or an associated person of the member:(A) has been found to have violated any securities-, insurance-, commodities-, financial- or investment-related laws, rules, regulations or standards of conduct of any domestic or foreign regulatory body, self-regulatory organization or business or professional organization;(B) is the subject of any written customer complaint involving allegations of theft or misappropriation of funds or securities or of forgery;(C) is named as a defendant or respondent in any proceeding brought by a domestic or foreign regulatory body or self-regulatory organization alleging the violation of any provision of the Exchange Act, or of any other federal, state or foreign securities, insurance or commodities statute, or of any rule or regulation thereunder, or of any provision of the by-laws, rules or similar governing instruments of any securities, insurance or commodities domestic or foreign regulatory body or self-regulatory organization;(D) is denied registration or is expelled, enjoined, directed to cease and desist, suspended or otherwise disciplined by any securities, insurance or commodities industry domestic or foreign regulatory body or self-regulatory organization or is denied membership or continued membership in any such self-regulatory organization; or is barred from becoming associated with any member of any such self-regulatory organization;(E) is indicted, or convicted of, or pleads guilty to, or pleads no contest to, any felony; or any misdemeanor that involves the purchase or sale of any security, the taking of a false oath, the making of a false report, bribery, perjury, burglary, larceny, theft, robbery, extortion, forgery, counterfeiting, fraudulent concealment, embezzlement, fraudulent conversion, or misappropriation of funds, or securities, or a conspiracy to commit any of these offenses, or substantially equivalent activity in a domestic, military or foreign court;(F) is a director, controlling stockholder, partner, officer or sole proprietor of, or an associated person with, a broker, dealer, investment company, investment advisor, underwriter or insurance company that was suspended, expelled or had its registration denied or revoked by any domestic or foreign regulatory body, jurisdiction or organization or is associated in such a capacity with a bank, trust company or other financial institution that was convicted of or pleaded no contest to, any felony or misdemeanor in a domestic or foreign court;(G) is a defendant or respondent in any securities- or commodities-related civil litigation or arbitration, is a defendant or respondent in any financial-related insurance civil litigation or arbitration, or is the subject of any claim for damages by a customer, broker or dealer that relates to the provision of financial services or relates to a financial transaction, and such civil litigation, arbitration or claim for damages has been disposed of by judgment, award or settlement for an amount exceeding $15,000. However, when the member is the defendant or respondent or is the subject of any claim for damages by a customer, broker or dealer, then the reporting to FINRA shall be required only when such judgment, award or settlement is for an amount exceeding $25,000; or(H) (i) is subject to a "statutory disqualification" as that term is defined in the Exchange Act; or (ii) is involved in the sale of any financial instrument, the provision of any investment advice or the financing of any such activities with any person that is subject to a "statutory disqualification" as that term is defined in the Exchange Act, provided, however, that this requirement shall not apply to activities with a member or an associated person that has been approved (or is otherwise permitted pursuant to FINRA rules and the federal securities laws) to be a member or to be associated with a member. The report shall include the name of the person subject to the statutory disqualification and details concerning the disqualification; or . . .
(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.
[A] willful violation of the securities laws means "intentionally committing the act which constitutes the violation."16 The laws do not require that the actor "also be aware that he is violating one of the Rules or Acts."17 If McCune voluntarily committed the acts that constituted the violation, then he acted willfully.=====Footnote 16: Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965); see also Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (citing Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949)); Craig, 2008 WL 5328784, at *4 (finding that respondent willfully violated IM 1000-1 and NASD Rule 2110 by providing false answers on his Form U4).Footnote 17: Wonsover, 205 F.3d at 414 (citing Gearheart & Otis, Inc. v. SEC, 348 F.2d 798 (D.C. Cir. 1965)).
Definition of DisqualificationSec. 4. A person is subject to a "disqualification" with respect to membership, or association with a member, if such person is subject to any "statutory disqualification" as such term is defined in Section 3(a)(39) of the Act.
I understand that this settlement includes a finding that I willfully omitted to state a material fact on a Form U4, and that under Section 3(a)(39)(F) of the Securities Exchange Act of 1934 and Article III, Section 4 of FINRA's By-Laws, this these omissions make me subject to a statutory disqualification with respect to association with a member.
For willfully failing to timely update Form U4, in violation of Article V, Section 2(c) of NASD's and FINRA's By-laws, NASD IM-1000-1, NASD Rule 2110, and FINRA Rules 1122 and 2010, Respondent is suspended from associating with any FINRA member firm in any capacity for [insert dates] and fined [insert amount]. Because his misconduct was willful, and the information he failed to disclose was material, he is subject to statutory disqualification.
Bill Singer's Comment:
Frequently, FINRA charges these felony-non-disclosure cases as "willful non-disclosure" and thereby set the stage for a statutory disqualification. In the Tedeschi AWC, FINRA did not allege that the non-disclosures were willful. That's an odd result given this language [Ed: emphasis supplied]:
Tedeschi was aware that he had been charged with two felonies and he discussed the charges with supervisors at Spartan in April 2019. However, Tedeschi did not amend his Form U4 within 30 days to disclose the charges . . .
As I have often noted in the past, FINRA has an obligation to offer the industry consistent guidance as to when it will and will not escalate a charge to a level of willful misconduct that triggers a statutory disqualification. In Tedeschi, I don't understand how FINRA alleged that the rep was aware of the felony charges and had discussed the charges with supervisors; and despite that, the regulator did not conclude that the non-disclosures were of a willful nature.
To be clear -- to be VERY clear -- I am NOT asserting that Tedeschi willfully failed to disclose the felony charges. In fact, given the omission of such a charge in the AWC, FINRA apparently concluded that Tedeschi's non-disclosure was inadvertent and non-willful. I'm puzzled as to why FINRA failed to provide us with a more detailed explanation as to the absence of a willfulness charge given that the fact pattern implies some willfulness but the regulator ultimately found none.
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