Mathis v. United States Sec. & Exch. Comm'n

• Citation: 671 F.3d 210
• Decision Date: 14 February 2012
• Docket Number: Docket No. 10–429–ag.
• Parties: Scott MATHIS, Petitioner, v. UNITED STATES SECURITIES & EXCHANGE COMMISSION, Respondent.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

671 F.3d 210

Scott MATHIS, Petitioner,

v.UNITED STATES SECURITIES & EXCHANGE COMMISSION, Respondent.

Docket No. 10–429–ag.

United States Court of Appeals, Second Circuit.

Argued: June 7, 2011.Decided: Feb. 14, 2012.

Eric S. Hutner, Hutner Klarish LLP, New York, N.Y., for Petitioner–Appellant.

Susan S. McDonald, Senior Litigation Counsel (David M. Becker, General Counsel; Mark D. Cahn, Deputy General Counsel; Jacob H. Stillman, Solicitor, on the brief), Securities and Exchange Commission, Washington, D.C., for Respondent–Appellant.

Before: MINER, LYNCH, and LOHIER, Circuit Judges.

LOHIER, Circuit Judge:

Petitioner Scott Mathis, a registered representative and principal with various brokerage firms over the years, seeks review of a December 7, 2009, final order of the Securities and Exchange Commission (the “SEC” or “Commission”), which concluded that Mathis willfully failed to disclose the existence of certain tax liens filed against him and thereby violated § 3(a)(39) and § 15(b)(4)(A) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. §§ 78c(a)(39) and 78 o(b)(4)(A). The SEC's conclusion that Mathis acted willfully, which followed Mathis's appeal of various determinations of the Financial Industry Regulatory Authority, Inc. (“FINRA”) and its predecessor, the National Association of Securities Dealers, Inc. (“NASD”),¹ subjects Mathis to statutory disqualification from the securities industry.

In his petition to vacate the SEC's order, Mathis argues that he was not aware that he was obligated to disclose the tax liens against him on FINRA's “Uniform Application for Securities Industry Registration or Transfer,” or “Form U–4,” which Mathis completed in November 1999 and August 2000. He also claims that he was unaware of his duty to amend a Form U–4 previously filed in 1995 to reflect the existence of the liens from 1996 onward. He therefore challenges the SEC's conclusion that his conduct was willful and that the tax liens were material information that had to be disclosed.

We conclude that there was substantial evidence supporting the SEC's factual finding that Mathis intentionally failed to disclose the liens on his Forms U–4 and that the liens were material. Moreover, the SEC did not abuse its discretion when it determined that Mathis's conduct constituted a willful violation of the Exchange Act's provisions relating to applications and registration. We therefore deny Mathis's petition and affirm the SEC's order.

BACKGROUND

The following facts are either undisputed or are supported by substantial evidence in the record.

1. The Forms U–4

From 1985 through 2002, Mathis worked in the securities industry as a broker or principal with various brokerage firms. At all relevant times, FINRA has required any person who works in the investment banking or securities business of a FINRA member to register as a securities representative ( e.g., a stockbroker) or principal, among other categories. NASD Rules 1022(a), 1031(a), 1032(a). To register, applicants must complete a Form U–4, in which they provide detailed information about their personal, employment, disciplinary, and financial background.

In September 1995, Mathis started as a broker with The Boston Group LP, a FINRA member, and signed and filed a Form U–4 (the “Original Form U–4”). After The Boston Group dissolved in July 1998, Mathis became associated with the National Securities Corporation (“National Securities”) as a broker and principal until September 2000, when he voluntarily stopped working there. For reasons not relevant here, Mathis was permitted to transfer his registration from The Boston Group to National Securities without submitting a new Form U–4.

In June 2000, Mathis became associated with InvestPrivate, Inc., a broker-dealer he founded and controlled. He signed and filed a second Form U–4 to register as a representative and principal with InvestPrivate on November 25, 1999. Starting in June 2000, Mathis also served as the chief executive officer and chairman of the board of directors of CelebrityStartUps.com, Inc. (“CelebrityStartUps”), a development-stage company he founded. On August 21, 2000, Mathis signed and filed a third Form U–4 to register as a representative and principal with CelebrityStartUps.²

In completing a Form U–4, applicants are required to “swear or affirm that [they] have read and understand the Items and Instructions on this form and that [their] answers (including attachments) are true and complete to the best of [their] knowledge.” In addition to requiring Mathis to affirm the accuracy of his answers, all three Forms U–4 at issue in this appeal—the Original Form U–4 and the two later forms filed in 1999 and 2000—required Mathis to update the information he provided on the forms “by causing an amendment to be filed on a timely basis whenever changes occur to answers previously reported.” He further represented that “to the extent any information previously submitted is not amended, the information provided in this form is currently accurate and complete.” Similarly, the general instructions for each form warned Mathis that he was “under a continuing obligation to update information required by Form U–4 as changes occur.” NASD Notice to Members No. 92–19 (April 1992), 1992 NASD Lexis 50, at *6 n.3; see Form U–4 Instructions, FINRA, 1 (May 18, 2009), http:// www. finra. org/ web/ groups/ industry/@ ip/@ comp/ @ regis/ documents/ appsupportdocs/ p 015111. pdf.

In addition to the Forms U–4 themselves, Article V, § 2(c) of the FINRA By–Laws requires that associated persons keep their Forms U–4 “current at all times,” and that amendments to the Form U–4 be filed “not later than 30 days after learning of the facts or circumstances giving rise to the amendment.” Failing to file prompt amendments to a Form U–4 violates NASD Conduct Rule 2110. See also FINRA Membership, Registration and Qualification Requirements (“FINRA Membership Rule”), IM–1000–1 (applicable rule prior to 2009, providing that an incomplete or inaccurate filing of information with FINRA by a registered representative “may be deemed to be ... sufficient cause for appropriate disciplinary action”). A person who willfully makes a false or misleading statement or a material omission in a Form U–4 is subject to the penalty of statutory disqualification. Exchange Act § 3(a)(39)(F), 15 U.S.C. § 78c(a)(39)(F).

2. The Tax Liens

In separate written notices between August 1996 and September 2002, the Internal Revenue Service (“IRS”) informed Mathis that it had entered five unsatisfied tax liens against him, totaling $634,436.28, due to Mathis's failure to pay a substantial portion of his personal income taxes owed for tax years 1993, 1994, 1995, 1997, 1999 and 2000. The five liens were as follows: (1) a $274,526.68 lien entered August 9, 1996, in connection with his unpaid taxes for 1993 and 1994 (the “August 1996 Tax Lien”); (2) a $53,302.53 lien entered September 23, 1998, in connection with unpaid taxes for 1995 (the “September 1998 Tax Lien”); (3) a $179,429.07 lien entered May 11, 1999, in connection with his unpaid taxes for 1997 (the “May 1999 Tax Lien”); (4) a $92,985.14 lien entered July 2, 2002, in connection with unpaid taxes for 1999 (the “July 2002 Tax Lien”); and (5) a $34,192.86 lien entered September 9, 2002, in connection with unpaid taxes for 2000 (the “September 2002 Tax Lien”). Each of these notices advised Mathis that the IRS had “made a demand for payment” of the unpaid tax liability and informed him that, as a consequence of his nonpayment, “there is a lien in favor of the United States on all property and rights to property belonging to [Mathis] for the amount of these taxes....”

In addition, sometime in 1999, after receiving most of the IRS notices, Mathis appears to have requested to pay his overdue taxes in installments. In letters to Mathis in late 1999 and 2002 approving his request, the IRS emphasized that to “protect the government's interest.... a Notice of Federal Tax Lien HAS ALREADY BEEN FILED.” The letters explained, moreover, that “[a] Notice of Federal Tax Lien is a public notice that the government has a claim against your property to satisfy a debt” and that the government would “release (remove) the lien” only when Mathis had paid what he owed.

Although the IRS notices alone provide substantial evidence that Mathis was aware of the unsatisfied tax liens, Mathis was also aware of the liens through other sources, including a work colleague. Tim Holderbaum, whom Mathis had hired to design a website for InvestPrivate, informed Mathis in December 2001 about a credit check that revealed Mathis was subject to a tax lien. In an email to Mathis dated December 6, 2001, Holderbaum wrote that he could not obtain the necessary credit approval to establish an online store for InvestPrivate “till the tax lean [sic] issue is resolved.” Holderbaum further testified that Mathis did not express any “concern or reservation” about that information.

Having learned of their existence as early as 1996, Mathis knowingly failed to disclose the liens on the two Forms U–4 filed in 1999 and 2000, failed timely to amend the Original Form U–4 to reflect those liens, and failed as well to amend the 1999 or the 2000 Forms U–4 to reflect the July 2002 and September 2002 Tax Liens.

Mathis's efforts to conceal the liens also involved affirmative misrepresentations. On both the 1999 and 2000 Forms U–4, for example, Mathis responded “no” to the question “Do you have any unsatisfied judgments or liens against you?” Similarly, on an Annual Representative Certification for National Securities, dated January 19, 1999, Mathis claimed that he had “paid all federal, state, and local taxes due in full,” and falsely denied having “any liens ... entered against you, which were not previously disclosed on [F]orm U–4.”

By letter dated July 3, 2003, FINRA asked Mathis to explain his failure to disclose the five federal tax liens. The letter...