(CN) – The 2nd Circuit upheld sanctions against a financial executive who lied on his broker registration form, hiding the fact that he faced more than $634,000 in tax liens.
Having failed to pay most of his income taxes between 1993 and 2000, the Internal Revenue Service entered five separate liens totaling $634,436.28 against Scott Mathis.
But when Mathis founded a brokerage called InvestPrivate and a development-stage company called CelebrityStartUps.com in 2000, he never made the disclosures.
The Uniform Application for Securities Industry Registration or Transfer – also known as a U4 – specifically asks registrants if they have any unsatisfied judgments or liens against them.
When the Financial Industry Regulatory Authority caught wind of the inadequate forms that Mathis filed, it charged him in 2005 with willfully failing to disclose the liens and with willfully failing to amend the forms.
A FINRA panel fined him $10,000 and issued a three-month suspension, and those penalties were upheld by the agency’s National Adjudicatory Council and by the Securities and Exchange Commission.
In his appeal to the SEC, Mathis argued that the alleged violation was not willful because he did not know that failure to disclose notices was a violation.
The SEC rejected the argument and said that Mathis was subject to “statutory disqualification” under the Securities Exchange Act, which could bar his association with any FINRA member firm.
Citing “substantial evidence” to support the finding that Mathis “willfully” violated broker registration requirements, the Manhattan-based federal appeals court also upheld the sanctions.
Mathis mounted conflicting arguments through the appeals process, according to the 19-page decision. First Mathis argued that he did not know about the tax liens, then he claimed to have relied on a adviser who told him he did not have to report them because they were not directly connected to the securities industry. He later claimed he that he had been distracted when he answered “yes” to a U4 question asking if he had paid all of his federal, state and local taxes.
Mathis also claimed that he believed he did not have to report notices of tax liens because he thought there was a difference between the notice and the actual lien.
In his appeal to the 2nd Circuit, Mathis said the SEC could prove willful violation only after proving that Mathis understood he was breaking a particular rule.
But the three-judge panel said circuit precedent in Tager v. SEC holds otherwise.
“We rejected Tager’s argument that the broker must have understood that he was violating a particular rule in order to be found to have willfully violated that rule,” Judge Raymond Lohier Jr wrote for the court. “In doing so, we explained that ‘it has been uniformly held that “willfully” in this context means intentionally committing the act which constitutes the violation. There is no requirement that the actor also be aware that he is violating one of the rules or acts.'”
An executive biography for Diversified Private Equity Corp. notes that Mathis founded the company in 1999 after 25 years in the financial industry. InvestPrivate is a DPEC subsidiary.
Mathis has paid the outstanding liens.