Swing And A Miss: A Rare Form U-4 Loss For FINRA

From Ulmer’s Broker-Dealer Law Corner Blog
Authors: Michael Gross and Alan Wolper

I have blogged multiple times, as recently as a couple of weeks ago, about the slew of Enforcement actions that FINRA has brought for an RR’s failure to update his or her Form U-4 in a timely manner to disclose a tax lien.  My partner, Michael Gross, examines one such case that FINRA managed to lose.  I’m sure it has nothing to do with Brad Bennett’s departure as head of Enforcement.   – Alan 

As many of you know, FINRA rarely loses when it alleges that a rep willfully failed to disclose material information on his or her Form U-4.  Last week, FINRA lost such a case: Department of Enforcement v. Vincent Au.  FINRA alleged that Vincent Au willfully failed to report an IRS tax lien on his Form U-4, and, in his defense, Au argued that he never knew about the lien.  FINRA made four arguments in its attempt to show that Au knew, or should have known, of the lien.  FINRA swung at, and missed on, all four pitches.  A review of the Decision shows what at least one hearing panel thought of a few very aggressive arguments made by FINRA.

Strike One

FINRA first argued that Au knew, or should have known, of the lien because the IRS sent a Notice of Federal Tax Lien to him at his address. FINRA contended that Au intentionally refused to receive the Notice, which was returned to the IRS marked “Unclaimed,” as evidenced by his receipt of other correspondence from the IRS at the same address.  Based on the circumstances here, the Hearing Panel determined that there was no evidence that Au intentionally failed to receive the Notice.

It is notable that the Panel rejected FINRA’s mistaken or intentional attempt to conflate, on the one hand, the standard for actual knowledge of the underlying event to be disclosed on Form U-4 with, on the other hand, the standard for willfulness (i.e., knew, or should have known, conduct was improper): “[T]he question here is not whether Au knew or should have known it was improper for him to fail to amend his Form U-4 after learning a lien was filed.  The question is whether Au knew the IRS filed the lien, triggering his disclosure obligation.”

In other words, the relevant inquiry is whether Au actually knew of the lien – the event required to be disclosed on Form U-4.

Strike Two

FINRA next argued that circumstantial evidence proved that Au knew, or should have known, of the lien.  Specifically, FINRA argued that the IRS put Au on notice of the lien because he received correspondence advising him that if he did not pay his outstanding tax bill by a certain date, then the IRS would file a lien.  That date came and went without Au paying the bill.  The Hearing Panel ruled, with information provided by FINRA’s own expert witness (more on this later), that the correspondence did not constitute notice that Au needed to amend his Form U-4. The Hearing Panel noted that the IRS was not required to file the lien when Au missed the payment deadline.

Strike Three

FINRA also argued, based on the testimony of its expert witness on “IRS practice and procedure,” that the revenue agent assigned to Au’s case would have informed Au or his representative of the lien.  The Hearing Panel properly rejected this testimony as being pure surmise: “[T]he expert’s testimony was conjecture based on what he believed should have occurred, and what he would have done in the accountant’s place. He could not know what the revenue agent said to Au and to the Aus’ personal representative, or what the Aus’ personal representative said to Au.”

Strike Four

Last, FINRA argued that Au knew, or should have known, of the lien because he received a Wage Levy Notice that contained a reference to the lien.  The Hearing Panel rejected this argument based on the ambiguity of the language in the Wage Levy Notice, which was not intended to put Au on notice of the lien.

Why Did FINRA Aggressively Pursue This Case?

Despite the obvious factual issue in this case – whether or not Au knew about the lien – FINRA chose not to take Au’s investigative testimony on the issue before filing its Complaint.  Despite this peculiarity, FINRA vigorously pursued its case against Au: it made very aggressive arguments; it incurred the expense of an expert witness; and the Decision identifies three Enforcement attorneys.  Why did FINRA aggressively pursue Au for failing to disclose a matter of public record on his publicly-available CRD record?  It is the author’s opinion that a review of Au’s CRD record provides insight into that question.  Au worked at several firms with disciplinary histories, and he has nine disclosures listed on his BrokerCheck report, including a few disciplinary actions.  A finding that Au willfully failed to disclose the lien on his Form U-4 would have resulted in him being statutorily disqualified from participation in the securities industry.