David A. Elgart v. Securities and Exchange Commission

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[DO NOT PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 17-15283
Non-Argument Calendar
________________________
Agency No. 3-17925
DAVID A. ELGART,
Petitioner,
versus
SECURITIES AND EXCHANGE COMMISSION,
Respondent.
________________________
Petition for Review of a Decision of the
Securities and Exchange Commission
________________________
(September 19, 2018)
Before MARTIN, JILL PRYOR, and EDMONDSON, Circuit Judges.
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PER CURIAM:
David Elgart petitions for review of a final order of the Securities and
Exchange Commission (“SEC”) sustaining a disciplinary action brought against
him by the Financial Industry Regulatory Authority (“FINRA”). On appeal, Elgart
challenges the SEC’s conclusion that he acted “willfully” in failing to disclose --
on his Uniform Application for Securities Industry Registration or Transfer (“Form
U4”) -- outstanding tax liens. No reversible error has been shown; we deny the
petition.
Elgart began working in the securities industry in 1971. In 1998, Elgart
became the president and chief compliance officer of Sequoia Investments, Inc., a
small broker-dealer and FINRA member. As a registered securities representative
and principal with FINRA, Elgart was required to file -- and to keep current -- a
Form U4. The Form U4 requests detailed information about an applicant’s
personal, employment, disciplinary, and financial background. In pertinent part,
question 14M of the Form U4 asks: “Do you have any unsatisfied judgments or
liens against you?” When Elgart first began his employment with Sequoia in 1998,
he responded “no” to this question on his Form U4.
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Between 2003 and 2010, Elgart became the subject of several tax liens,
including three federal tax liens and two State of Georgia tax liens: totaling
$388,755.98. Elgart testified that he received notice of each lien at or about the
time it was issued. In January 2013, Elgart met with a tax lawyer who also notified
Elgart about the number and amount of the outstanding tax liens.
Meanwhile, in the ten years following the filing of the first tax lien in July
2003, Elgart amended his Form U4 thirteen times. Four of these amendments were
filed after Elgart met with his tax lawyer in January 2013. Elgart’s response to
question 14M remained unchanged.
As part of a routine examination of Sequoia in late 2013, FINRA staff asked
Elgart to complete a Personal Activity Questionnaire (“PAQ”). Question 21 of the
PAQ asked: “Do you have any unsatisfied judgments or liens against you? If yes,
provide detail as to each.” Elgart completed and signed the PAQ in November
2013; Elgart responded “no” to Question 21, without further explanation.
In December 2013, FINRA contacted Elgart about discrepancies between
the responses on his Form U4 and PAQ and the results of a record search that
revealed the outstanding tax liens. On 23 December 2013, Elgart amended his
Form U4 to disclose the tax liens. In that filing, Elgart reported that he first
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learned of each lien on 1 January 2013. Despite requests by FINRA staff, Elgart
filed no amendments to his PAQ to disclose the tax liens.
In November 2015, FINRA’s Department of Enforcement filed a complaint
against Elgart, alleging Elgart violated FINRA by-laws and Rule 1122 and Rule
2010 by (1) failing to disclose timely his tax liens on his Form U4, and (2) making
a false statement to FINRA on his PAQ by denying the existence of the liens. A
FINRA Hearing Panel found that Elgart committed the alleged violations and that
his failure to amend his Form U4 had been willful. The Hearing Panel suspended
Elgart for a total of seven months from associating with a FINRA member firm
and imposed a fine of $20,000. Elgart appealed to FINRA’s National Adjudicatory
Council (“NAC”), which affirmed the Hearing Panel’s decision.
Elgart then petitioned the SEC to review the NAC decision. In pertinent
part, the SEC determined that Elgart’s failure to amend his Form U4 had been
willful and that he was therefore subject to statutory disqualification. In doing so,
the SEC rejected Elgart’s contention that he misunderstood the scope of the
disclosure required by question 14M.
In reviewing the SEC’s decision, we treat the SEC’s factual findings as
conclusive as long as they are “supported by substantial evidence.” 15 U.S.C. §
78y(a)(4); ZPR Inv. Mgmt. v. SEC, 861 F.3d 1239, 1248 (11th Cir. 2017).
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“Substantial evidence is such relevant evidence as a reasonable mind might accept
as adequate to support a conclusion.” ZPR Inv. Mgmt., 861 F.3d at 1248
(quotations omitted). “The substantial evidence standard limits the reviewing court
from deciding the facts anew, making credibility determinations, or re-weighing
the evidence.” DeKalb Cnty. v. United States DOL, 812 F.3d 1015, 1020 (11th
Cir. 2016). Under this standard of review, “we will reverse such findings only
when the record compels a reversal; the mere fact that the record may support a
contrary conclusion is not enough.” Id.On appeal, Elgart challenges only the SEC’s finding that he acted willfully
in failing to disclose his tax liens on his Form U4 and, thus, was subject to
statutory disqualification. Elgart raises no challenge to the SEC’s determination
that he failed to update timely his Form U4, that the omissions on his Form U4
were material, that he submitted false information on his PAQ, or that his conduct
violated FINRA Rules 1122 and 2010 and FINRA’s by-laws.
A person acts “willfully” within the meaning of the federal securities laws if
he “intentionally committed the act which constitutes the violation.” ZPR Inv.
Mgmt., 861 F.3d at 1255 (alteration omitted). A person “need not also be aware
that he is violating one of the Rules or Acts.” Id. (quotation omitted).
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Substantial evidence supports the SEC’s finding that Elgart acted willfully in
failing to disclose his outstanding tax liens on his Form U4. Elgart was aware of
his continuing obligation to amend his Form U4 to reflect changes to his reported
answers. Elgart testified that he learned of the tax liens shortly after each lien was
issued. Elgart also discussed his outstanding tax liens with his tax lawyer in
January 2013. Despite his having knowledge of the tax liens, Elgart testified that
he decided not to report the tax liens on his Form U4 because the liens were filed
against him personally, and not against the firm. Because Elgart’s decision not to
disclose his tax liens on his Form U4 was an intentional act, sufficient evidence
exists to support a determination that his conduct was willful.
Elgart contends, however, that his failure to disclose the tax liens was
inadvertent -- and not willful -- because it stemmed from his misunderstanding that
question 14M applied only to outstanding liens or judgments “that could endanger
or impact the firm and its clients.” Because the tax liens were filed against Elgart
personally, he says he believed mistakenly that he was under no obligation to
report them.
We are unpersuaded by this argument. The Hearing Panel determined --
based on Elgart’s demeanor at the hearing and on the evidence presented -- that
Elgart’s testimony that he misunderstood question 14M was not credible. The SEC
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then deferred to the Hearing Panel’s credibility determination. Elgart raises no
challenge to the adverse credibility finding on appeal, and we defer to the agency’s
credibility determination absent substantial evidence to the contrary. Cf. DeKalb
Cnty., 812 F.3d at 1020; Daniel D. Manoff, 55 S.E.C. 1155, 1162 & n.6 (2002)
(credibility determinations may “be overcome only when there is ‘substantial
evidence’ for doing so.”).
Because no substantial contrary evidence exists, we defer to the agency’s
adverse credibility determination in this case. The credibility determination is also
supported by the unambiguous language of question 14M, Elgart’s inconsistent
testimony about when he first learned of the tax liens, and that Elgart’s purported
misunderstanding of question 14M conflicted with his testimony that he was
unaware of the contents of Form U4.
Elgart contends that the SEC’s willfulness determination is contrary to the
Hearing Panel’s decision in Dep’t of Enf’t v. Harris, Disciplinary Proceeding No.
C07010084 (NASD May 31, 2002), and to the Second Circuit’s decision in Mathis
v. SEC, 671 F.3d 210 (2d Cir. 2012). In Harris, the Hearing Panel determined that
the respondent’s failure to disclose a prior misdemeanor on his Form U4 was not
“willful” when the omission resulted in part from a misreading of the question.
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Harris is distinguishable from this case, however, because (among other reasons)
the Hearing Panel credited the respondent’s testimony.
Elgart cites to language in the Mathis opinion that says that “an inadvertent
filing of an inaccurate form” is insufficient evidence of willfulness. See Mathis,
671 F.3d at 218. But the Mathis decision is not inconsistent with the SEC’s
“willfulness” determination in this case. Instead, the Second Circuit concluded
that sufficient evidence supported a finding of “willfulness” because the
respondent -- like Elgart -- denied having unsatisfied judgments or liens against
him even though he had received IRS notices and was, thus, aware of his
outstanding tax liens before filing his Form U4. See id.
We reject Elgart’s contention that FINRA’s application of the willfulness
standard is inconsistent and “so vague” that it provides no guidance and deprives
its members and associated persons of “fair procedure.” The willfulness standard
applied in this case is consistent with the standard that has long been applied by the
SEC and by federal appellate courts. See, e.g., Tager v. SEC, 344 F.2d 5, 8 (2d
Cir. 1965) (“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.”); Mathis, 671 F.3d at 218 (citing Tager); ZPR Inv. Mgmt., 861 F.3d at 1255.
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Moreover, a finding of willfulness is dependent on the facts and
circumstances of each individual case. Elgart has cited no case with materially
similar facts in which the willfulness standard was applied differently than in this
case. Among other things, each of the cases Elgart relies upon involved a
settlement. We have said the SEC abuses no discretion in imposing lesser
sanctions as a reward for settlement. See Orkin v. SEC, 31 F.3d 1056, 1067 (11th
Cir. 1994).
Substantial evidence supports the SEC’s determination that Elgart acted
intentionally in failing to disclose his tax liens on his Form U4 and, thus, that his
conduct was willful. We are not compelled to reverse that finding on appeal.
PETITION DENIED.
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