by Bill Singer
Giving FINRA the Silent Treatment -- And Getting Barred for It.
May 7, 2010
On October 28, 2008, M.L. Stern & Co., LLC ("M.L. Stern"), a former Financial Industry Regulatory Authority (FINRA) member firm, filed a Uniform Application for Securities Industry Registration (the "Form U4") with FINRA on behalf of Gregory S. Profeta (Profeta). M. L. Stern amended Profeta's Form U4 on December 23, 2008. Among other things, the Form U4 asks whether an applicant had been charged with any felony. The U4 also inquires as to certain misdemeanors, among which would be a misdemeanor involving the wrongful taking of property. Profeta did not disclose anything on his Form U4 in response to these questions.
M.L. Stern terminated Profeta on January 14, 2009 for failure to pass the General Securities Representative Examination.
A Five-Letter Man -- And We're Not Talking High School Sports
FINRA conducted a background search on Profeta and discovered three criminal matters that Profeta may have been required to disclose on the Form U4.
Two Requests for Responses
FINRA Rule 8210 requires individuals associated with a FINRA member firm to provide information upon request with respect to any matter involved in an investigation. On April 16, 2009, FINRA sent Profeta a letter (the "First Letter") pursuant to FINRA Rule 8210 requesting certain information regarding his non-disclosure of criminal matters. The First Letter sought related charging documents, documents evidencing sentencing or disposition, and why such matters were not disclosed by Profeta on the Form U4. The First Letter asked for Profeta's response by April 30, 2009. FINRA sent the First Letter to Profeta's address of record in the Central Registration Depository (the "CRD"). Profeta does not contest receipt of the First Letter and did not respond to it.
On May 1, 2009, FINRA sent Profeta a second letter (the "Second Letter"), which was returned to FINRA marked "unclaimed" on May 19, 2009.
Warning of Suspension
On August 5, 2009, FINRA sent Profeta a third letter (the "Third Letter") notifying him that pursuant to FINRA Rule 9552(a), he would be suspended on August 31, 2009 if he did not provide FINRA with the information requested in the First and Second Letters. FINRA Rule 9552(a) permits FINRA to suspend the association of an individual with a FINRA member firm upon twenty-one days' notice if such individual does not provide FINRA with information requested pursuant to FINRA's rules. The Third Letter further notified Profeta of his right to request a hearing in connection with this matter prior to August 31, 2009 pursuant to FINRA Rule 9552(e). Profeta does not contest receipt of the Third Letter and did not respond to it.
Notice of Suspension
On August 31, 2009, FINRA sent Profeta a fourth letter (the "Fourth Letter") notifying him of his suspension effective that date and notifying him that he would be barred from associating with a FINRA member in any capacity on February 8, 2010, pursuant to FINRA Rule 9552(h) if he did not provide FINRA with the requested information and request termination of his suspension pursuant to FINRA Rule 9552(f). FINRA sent the Fourth Letter to Profeta's CRD address and to five other addresses associated with Profeta that FINRA had obtained through a search of public records. Profeta does not contest receipt of the Fourth Letter and did not respond to it.
Notice of Bar
On February 8, 2010, FINRA sent Applicant a fifth letter (the "Fifth Letter") notifying him that he was barred from associating with a FINRA member firm in any capacity effective that date. The Fifth Letter also notified Applicant of his right to appeal the disciplinary sanction to the Commission within thirty days. Applicant timely filed this application for review.
SEC Appeal
On March 8, 2010, Gregory S. Profeta ("Applicant") filed with the Securities and Exchange Commission (SEC) an application for review of disciplinary action taken by the Financial Industry Regulatory Authority, Inc. ("FINRA") on February 8, 2010, which barred Applicant from associating with any FINRA member in any capacity. On March 22, 2010, FINRA filed a "Motion to Dismiss Profeta's Application for Review and to Stay Briefing Schedule" in which FINRA asked the SEC to, among other things, dismiss Profeta's appeal because Profeta failed to avail himself of FINRA's procedures to contest the bar. Profeta did not file a response to FINRA's motion. In the Matter of the Application of Gregory S. Profeta for Review of Disciplinary Action Taken by the Financial Industry Regulatory Authority, Inc. (ORDER GRANTING MOTION TO DISMISS APPLICATION FOR REVIEW / Securities Exchange Act Rel. No. 62055, Admin. Proc. File No. 3-13810, May 6, 2010).
Profeta does not dispute the basis for FINRA's action: that he had notice of FINRA's requests and failed to respond to FINRA's letters or request a hearing to contest his impending sanction. Instead, Profeta argues that with respect to one of the criminal matters discovered by FINRA:
I was not charged with anything. . . my lawyer said that I do not have to answer yes to the question as I was not sentenced and in fact the records, because I was under 18 years old, were expunged from my records.
Regarding the other two criminal matters discovered by FINRA, Profeta argues that
I did not state anything about these incidents because they are not accurate. I have no recollection of any conviction of [the matters identified by FINRA]. In fact it is insulting to me that somehow these accusations about me are being stated. This is in fact part of the reason that I have waited to respond. When I first saw this it really offended me and I did not want to even dignify the letter with a response.
Bad Choices
FINRA's rules set forth the procedures for suspending and ultimately barring individuals who fail to supply requested information or take corrective action. Pursuant to these rules, FINRA informed Profeta in its various letters to him that he would be suspended and automatically barred if he failed to respond to FINRA's inquiry or request a hearing to contest his impending sanction. Profeta chose not to avail himself of these procedures. He failed to respond to FINRA's requests for information or request a hearing to contest his impending sanction. As a result, Profeta's bar was imposed automatically in accordance with FINRA's rules.
The SEC characterized Profeta's conduct as a choice to not respond to FINRA's letters and a choice to not request a hearing to challenge his impending sanction, and therefore cannot complain at this stage about the consequence of his choice. Moreover, the SEC has long held that it will not consider an application for review if the applicant failed to exhaust FINRA's procedures for contesting the sanction at issue.Bill Singer's Comment: An odd aspect of Profeta is that I can't find in either FINRA's or the SEC's various reports or decisions any precise reference to just what the three alleged underlying criminal events were -- was there a felony charge or conviction? was there a qualifying misdemeanor charge or conviction? The regulators just don't spell it out. On the other hand, Profeta's responses are provided and it's clear that he believes that he wasn't charged with anything and/or that any charges/convictions were expunged. Moreover, he seems to have consulted an attorney whose legal opinion was that Profeta didn't have to disclose anything.
Clearly, Profeta was insulted and offended even by the merest suggestion that he had done something wrong. He opted for the silent treatment. Unfortunately, the better way to have channeled such outrage would have been to timely respond to the first two Rule 8210 demand letters from FINRA -- or to the warning of suspension, or the notice of suspension, or the notice of bar.
Profeta's silence wasn't an effective response; in fact, if anything, it was no response. As Profeta learned, you don't get to ignore the entire FINRA administrative process and then simply contact the SEC and ask for a do-over.
Ultimately the whole point of Profeta isn't what he did in terms of any allegedly disclosable criminal event (or even any allegedly criminal event) but what he didn't do in terms of responding to a regulatory inquiry. By ignoring five FINRA communications, Profeta seems to have destroyed his Wall Street career.
A lesson for all of you:Tossing FINRA's mail in the garbage is not an effective appellate strategy.