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Finra Sanctions Based On Failure To Disclose Complaints and Tax Liens Upheld – Statutory Disqualification Invoked

Scott Mathis, Exchange Act Rel. 61120, December 7, 2009

Time since appeal – 10 months 17 days
Time since last brief – 5 months 16 days

NASD found that Mathis (a registered rep and general principal) failed to disclose IRS tax liens on his Form U4 disclosures. The liens totaled almost $600,000. For this he was fined $10,000 and suspended for 3 months. As a result of failing to disclose a customer complaint and a customer law suit he was fined $2,500 and suspended for 10 days with the suspensions to run concurrently. The NASD found the violations to be willful. This finding triggers the "statutory disqualification" in Exchange Act §§ 3(a)(39) and 15(b)(4)(A) that prohibits any broker from allowing Mathis to associate with it. Thus Mathis is barred from associating with a broker or dealer regardless of the length of the specific Finra suspensions.

Finra rules specifically require the disclosure of tax liens. In order to invoke the statutory disqualification, the willful violation must involve a material fact. The Commission found the liens to be material under the TSC Industries Inc. v. Northway, Inc. test. It held that investors would find the information material in determining whether to place confidence in him. It found that the liens were material to regulators and potential employers who would likely judge his ability to handle his own financial obligations as significant.

This case is significant as it highlights the very important collateral effect resulting from the statutory disqualification where there is a finding that someone has willfully filed a materially false form U4.