February 22, 2012 / 7:57 PM / 8 years ago

How lies and legal problems snowball

(Reuters) - Brokers who hide embarrassing legal troubles from their employers risk triggering a new set of problems that could be worse.

The fallout might not be apparent until years later. Consequences include being fired, suspended, or barred from the industry. As for the brokerage, it would then face questions about the broker’s honesty.

These issues are in the spotlight again after recent cases of brokers being penalized for disclosure violations.

“You have someone who is not forthcoming about the facts. Is that someone you want carrying your flag and dealing with other people’s money?” said Thomas Potter, a lawyer for Burr & Forman LLP in Nashville, Tennessee.

Brokers must undergo various security procedures when applying for jobs, which include disclosing certain legal infractions. Not being forthcoming about the past can cause a loss of confidence in the brokerage and more legal problems for the broker.

A recent federal court decision shows just how difficult it can be to undo the damage. Broker Scott Mathis has been battling with the Financial Industry Regulatory Authority (FINRA) since 2003 for not disclosing nearly $640,000 in tax liens on a required form.

FINRA’s predecessor organization fined Mathis $10,000 in 2007 and suspended him for three months, for “willfully” failing to disclose the liens. He started racking them up in 1996, ultimately accumulating five liens, but did not include them on disclosure forms to apply for industry jobs in 1999 and 2000.

Mathis, who now heads DPEC Capital Inc in New York, also did not update the forms after learning of his tax problem, according to regulatory documents. He finally updated the forms in 2003, after regulators questioned why he did not include the liens.

Penalties for “willful” acts are more serious than those for conduct that is inadvertent. Mathis argued that his conduct was not willful because the U.S. Internal Revenue Service notified him only of a “possible” lien, not an actual one requiring disclosure. His argument failed, despite three appeals.

The stakes are highest in cases about whether a violation is willful, said Eric Hutner, a lawyer for Hutner Klarish LLP in New York, who represented Mathis.

“Unfortunately, the court didn’t agree with our analysis,” said Hutner, noting Mathis repaid the taxes in 2003.

Mathis said that the tax problem came about because his funds were tied up in private securities. He participated in an ongoing payment plan with the IRS throughout the period, he said. “It was not willful,” he said in a telephone interview from Dubai.

Other brokers settle with regulators far earlier in the process. In January, a broker in New York agreed to a fine and 13-month suspension for not informing his employer that he had pled guilty to charges of driving while under the influence of drugs.


Brokers are often embarrassed about past legal problems and fear that disclosing them will mean losing a job opportunity.

The disclosure form that brokers must complete, known as Form U4, includes specific questions, such as whether the broker has pled guilty to a felony or made a compromise with creditors. Some brokers are confused by the form, or afraid to include the information, said Marc Dobin, a lawyer in Jupiter, Florida, who represents brokers.

Brokers must update the forms when the answers to questions change, such as after a filing for bankruptcy while employed.

Other legal problems, however, will be a turn-off. Brokerages typically won’t take a chance on a broker whose rap sheet reveals dishonesty, such as pleas involving theft or fraud, Dobin said.

Recruiters may try to sway brokers to gloss over the forms so they can easily place clients in new positions and earn fees, said Brian Buckstein, an employment lawyer in Wellington, Florida.


Here’s a good reason to be honest: It’s easy to get caught in a lie.

Brokers who aren’t forthcoming about their pasts often underestimate how easy it is for employers to find details about their backgrounds. Widespread use of the Internet and databases make it simple to quickly confirm details such as a person’s criminal history and education.

Sometimes brokerages learn of some legal problems, such as a tax lien, because it receives a wage garnishment request from the broker’s creditor, Dobin said.

Brokerages that stumble upon those facts usually fire the broker. Then more damage sets in.

A disclosure about the broker’s discharge and the company’s reasons for it appear in the broker’s public disclosure report. That may trigger questions from FINRA and disciplinary action.

“Once you fail to disclose, you have raised an issue of honesty and trust with your employer,” said Buckstein, the Florida-based employment lawyer. “If you lie, you not going to have too many good choices.”

But not all offenses lead to being fired, said Dobin. Many brokers whose histories include drug possession or drunk driving, for example, work in the business, he said.

Reporting By Suzanne Barlyn; Editing by Walden Siew

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