In Mathis v. SEC, WL 447378 (2d Cir. Feb. 14, 2012), the Second Circuit upheld a final order from the Securities and Exchange Commission (“SEC”) against Scott Mathis.

The court characterized the facts in the case as "either undisputed or . . . supported by substantial evidence in the record."  As the opinion described, Mathis was a registered representative and principal under the Financial Industry Regulatory Authority, Inc. (“FINRA”).  FINRA fined Mathis $10,000 and imposed a three-month suspension after it found that Mathis willfully failed to disclose tax liens in his FINRA membership forms.  Mathis appealed the SEC’s final order, which held that Mathis was subject to statutory disqualification from associating with any FINRA member. 

In September 1995, Mathis started working as a broker and filed his first Form U-4 with FINRA.  FINRA rules require that any person working for a member firm in the securities or investment banking division must register.  Applicants register by filing a Form U-4 with FINRA.  FINRA rules also require that an applicant file an amended Form U-4 whenever any of the applicant’s answers change from a previously filed Form U-4.  One of the questions on Form U-4 asks the applicant if he has any liens or judgments against him.  Mathis answered “no” to this question.  Mathis also answered that all of his income taxes were paid in full. 

Between August 1996, and September 2002, Mathis received several written notices from the IRS stating that he had unpaid personal income taxes totaling $634,436.28 for tax years 1993 – 2000.  Additionally, the IRS sent a notice stating that it had filed five tax liens against Mathis’ property.  In November 1999, Mathis filed a second Form U-4 after he founded his own broker dealer firm.  In August 2000, Mathis filed a third Form U-4 with FINRA after starting another business.  Mathis did not disclose the tax liens on either form. 

In 2003, FINRA inquired about the tax liens.  At this point, Mathis filed an amended Form U-4 and disclosed the tax liens for the first time.  Mathis initially claimed he was unaware of the tax liens and his obligation to report them to FINRA.  FINRA rejected this argument after Mathis admitted he received the lien notices from the IRS.  The court also noted that a web designer Mathis hired brought the tax liens to Mathis’ attention after performing a credit check.  Mathis then asserted that he had relied on the advice of a former colleague who opined that “if the matters were not directly related to the securities industry, they need not be reported on the Form U-4.”  Finding that Mathis was aware of the tax liens and that he “made a conscious effort to conceal his tax liabilities,” FINRA imposed a $10,000 fine and a three-month suspension in December 2007.  FINRA’s decision noted that because Mathis relied on the advice of a former colleague, he had not acted willfully. 

Mathis appealed the FINRA decision to FINRA’s National Adjudicatory Council (“NAC”).   In December 2008, NAC affirmed FINRA’s decision "but disagreed" that Mathis had "reasonably relied" on the colleague's advice and instead found that he had acted willfully by failing to disclose the tax liens.  NAC held that Mathis’ former colleague had only offered his opinion about what matters had to be disclosed and that Mathis should have checked with the company’s compliance department to determine if the liens had to be disclosed.  NAC upheld FINRA’s decision noting the sanctions were appropriate for “Mathis' willful failure to amend his Form U4 to disclose the five tax liens at issue and his willful failure to disclose the tax liens pending against him at the time he filed two initial Forms U4."

Next, Mathis filed a petition with the SEC, challenging NAC’s finding that he had acted willfully.  The SEC sustained NAC’s holding and held that Mathis would be subject to statutory disqualification under the Exchange Act.  The SEC found “willful” to mean intentionally committing an act that resulted in the violation. The SEC also found that a person does not need to be aware that he is violating a rule to act willfully.  Finally, Mathis petitioned the Second Circuit to review the SEC’s decision. 

In his argument to the Second Circuit, Mathis asserted that a “broker who justifiably relies on advice from a person of suitable experience, position, and knowledge has not engaged in willful conduct.”  The court upheld the SEC’s finding that Mathis had not relied on his former colleague’s advice and also noted there was no record of Mathis checking with the company’s compliance department about disclosing the liens on Form U-4. 

The Second Circuit found there was substantial evidence to sustain the SEC’s holding.  The court also held that Mathis acted willfully under § 3(a)(39) of the Exchange Act when he failed to disclose the liens and when he submitted the 1999 and 2000 Form U-4s, which he knew contained incorrect statements. 

The primary materials for this case may be found on the DU Corporate Governance website.