Appeals Court affirm SEC Finding that Broker Acted “Willfully” When Keeping IRS Lien Information from FINRA

The U.S. Court of Appeals for the Second Circuit says that the Securities and Exchange Commission did not abuse its discretion when it determined that broker Scott Mathis “willfully” withheld information from the Financial Industry Regulatory Authority about tax liens. Mathis had submitted a petition seeking for the court to review the SEC order. However, the court, denying the request, found that there was “substantial evidence” backing up the SEC’s findings that he did in fact hold back information in a willful manner.

Between 1985 and 2002, Mathis was a principal or broker at numerous financial firms. He had submitted three Form U-4 registrations with FINRA. It was after 1996 that the IRS put in five tax liens against him. The federal agency accused him of not paying his personal income taxes over a several-year period. Mathis is accused of not noting the liens in filings with FINRA even though he is purported to have known about them.

According to the court, in 2003 FINRA asked Mathis to explain why he didn’t reveal the liens. He told the SRO he wasn’t aware that they existed or that he had an obligation to note them down on his Form U-4. FINRA then began proceedings against the broker, ultimately holding that he acted “willfully” in failing to report the tax liens. He was suspended for three months and fined $10,000.

Mathis turned to the SEC for review of the matter. The Commission determined that the broker “voluntarily” lied on his filings with FINRA and it then proceeded to bar him from the industry.

Mathis went to the Second Circuit, contending that the 1934 Securities Exchange Act does not support the way the SEC interpreted “willful” in his case. He pressed his argument that a “willfulness” finding needed the determination that he knew he was violating a specific regulation or rule.

The court rejected his argument and found that if Mathis purposely turned in an application to register with a FINRA member while knowing that the form held information that was materially false, then he is subject to statutory disqualification. The court pointed to the SEC’s finding, which it says has standing because Mathis did not note the liens on a National Securities Annual Certification. Also, the Form U-4s include reminders and warnings that filings must be updated with new information. It wasn’t until after FINRA began its inquiry that the forms were revised.

In rejecting Mathis’s challenge of the materiality of information regarding the tax liens, the court said it was not difficult to support the SEC’s determination that by leaving out the info about the tax liens, the broker had “significantly altered” the information available to FINRA, employers, regulators, and investors.

Shepherd Smith Edwards and Kantas, LTD, LLP is a securities fraud law firm that represents investors throughout the US.

2nd Cir. Affirms SEC’s Finding That Broker ‘Willfully’ Withheld IRS Lien Info From FINRA
, BNA, February 14, 2012

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