~,,. Ftnra l .. HARD COPY fin~nc1a l Industry Regulatory lluthonty

Lisa Jones Toms Assistant General Counsel

February 8, 20 I 6

VIA MI~SS I~NGER

Brent J. Fields Secretary

Direct: (202) 728-8044 Fax: (202) 728-8264

Securi ties and Exchange Commission I 00 F Street, NE Washington, DC 20549- 1090

Rg: In the Matter of the Application of Rani T .. farkas Administrative Proceeding File No. 3-16948

Dear Mr. Fields:

Enclosed please find the original and three (3) copies of FINRJ\ 's Brief in Opposition to Application fo r Review in the above-capt ioned matter.

c)6;;:;0~ Lisa Jones Toms

Enclosure

cc: Robert J. Stumpf, Jr., Esq. Ciara Gray

Investor protection. Market integrity. 1 7~) 1 .Slr ce l.t-.JW t 2027288000 W;:i~ h1nglon. DC 2000(J 1 506

wwv; f1 n ra.org

~,,,,., HARD COPY

F1nra 1

" I 111.incial Industry Regulatory l\ulho11ty

Lisa Jones Toms Assistant General Counsel

February 8, 201 6

VIA Ml~SSENGER

Brent J. Fields Secretary Securities and Exchange Commission I 00 F Stree t, N I ~

Washington, DC 20549- 1090

Direct: (202) 728-8044 Fax: (202) 728-8264

RE: In the Matter of the Application of Rani T. Jarkas Administrative Proceeding File No. 3-16948

Dear Mr. Fields:

Enclosed please find the original and three (3) copies of FINRJ\ ' s Brief in Opposition to Application fo r Review in the above-captioned matter.

c)6;:;~ Lisa Jones Toms

Enclosure

cc: Robert J. Stumpf, Jr. , Esq. Ciara Gray

Investor protection. Market integrity. 1 73~ I , (11.?l'l, NW t 202 728 8000

W;:islHn15l o 11. DC www f1nra o rg

.:>aoor.-1 sor

BEFORE THE

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC

In the Matter of the Application of

Rani T . .Jarkas

For Review of Disciplinary Action Taken by

FIN RA

File No. 3-16948

FINRA'S BRIEF IN OPPOSITION TO THE APPLICATION FOR REVIEW

February 8, 2016

Alan Lawhead Vice President and Director - Appellate Group

Gary Dernelle Associate General Counsel

Lisa Jones Toms Assistant General Counsel

FINRA Office of General Counsel 173 5 K Street, NW Washington, DC 20006 (202) 728-8044 Telephone

TABLE OF CONTENTS

I. INTRODUCTION ................................................................................................................. 1

II. ST A TEMENT OF FACTS .................................................................................................... 3

A. Jarkas' Background .................................................................................................... 3

B. Global Crown's Net Capital and NASO Rule 1017 Filing Deficiencies ................... 3

C. Jarkas Refuses to Provide Requested lnformation ..................................................... 7

D. Jarkas Fails to Appear for On-The-Record Testimony .............................................. 9

E. Jarkas' Medical Condition ........................................................................................ 10

III. PROCEDUML BACKGROUND ........................................................................................ 12

IV. ARGUMENT ......................................................................................................................... 14

A. The Record Overwhelmingly Supports the NAC's Findings ofMisconduct ............ 16

I. Jarkas Engaged in a Securities Business in Violation of the Net Capital Rule ................................................................................................... 16

2. Jarkas Failed to File a Continuing Membership Application in Violation of NASD Rules 1017 and 2110 ..................................................... 21

3. Jarkas Failed to Appear for On-the-Record Testimony in Violation of FINRA Rules 8210 and 2010 ......................................................................... 24

B. The NAC's Sanction of a Bar is Consistent with the Sanction Guidelines and Appropriate for J arkas' Misconduct .......................................................................... 28

1. The NAC Correctly Barred Jarkas for His Failure to Appear for On-The-Record Testimo11y ............................................................................ 29

2. Jarkas' Claims of Mitigation Are Unsubstantiated ....................................... 33

V. CONCLUSION ...................................................................................................................... 38

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TABLE OF AUTHORITIES

Federal Decisions

Mitchell v. Pidcock. 299 F.2d 281 (5th Cir. J 962) ........................................................................ 35

SEC Decisions and Orders

Howard Brei/ Berger, Exchange Act Release No. 58950, 2008SECLEXIS3141 (Nov.14,2008) ...................................................................................... 33

Sundra Escoll-Russe/l, 54 S.E.C. 867 (2000) ................................................................................ 31

David Kristian Evansen, Exchange Act Release No. 75531, 2015 SEC LEXIS 3080 (July 27, 2015) ....................................................................................... .32

Fox & Co. Inv.\·., Inc., 58 S.E.C. 873 (2005) ...................................................................... 16, 17, 20

Gregmy Evan Goldstein, Exchange Act Release No. 71970, 2014 SEC LEXIS 1350 (Apr. 17, 2014) .................................................................................. 29, 32

Kirlin Sec. Inc., Exchange Act Release No., 61135, 2009 SEC LEXIS 4168 (Dec. 10, 2009) ....................................................................................... 22

Kirk A. Knapp, 51S.E.C.115 (1992) ...................................................................................... 18, 21

Blair C. Mielke, Exchange Act Release No. 75981, 2015 SEC LEXIS 3921 (Sept. 24, 2015) ....................................................................................... 27

Net Capital Rule, Exchange Act Release No. 28927, 1991 SEC LEXIS 332 (Feb. 28, 1991) ............................................................................................ 7

N. Woodward Fin. Corp., Exchange Act Release No. 74913, 2015 SEC LEXIS 1867 (May 8, 2015) .............................................................................. 29, 32, 38

Paul L. Rice, 1973 SEC LEXIS 3477 (Apr. 30, 1973) ................................................................. 34

FINRA Decisions

Dep 't of Enforcement v. Craig, Complaint No. E8A200409590 l, 2007 FINRA Discip. LEXIS 16 (FINRA NAC Dec. 27, 2007) ................................................... 36

Dep't of Enforcement v. Evansen, Complaint No. 2010023724601, 2014 FINRA Discip. LEXIS 10 (FINRA NAC June 3, 2014) ...................................................... 27

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Dep 't of Enforcement v. Gallagher, Complaint No. 2008011701203 2012 FIN RA Discip. LEXIS 61 (FIN RA NAC Dec. 12, 2012) .................................................... 31

Dep 't of El?forcement v. Hodde, Complaint No. C 100 I 0005, 2002 NASO Discip. LEXIS 4 (NASO NAC Mar. 27, 2002) ...................................................... .35

Dep 't of Enforcement v. Saad, Complaint No. 2006006705601 r, 2015 FINRA Discip. LEXIS 49 (FINRA NAC Mar. 16, 2015) ................................................... .34

Dep 't of Enforcement v. Walblay, Complaint No. 2011025643201, 2014 FINRA Discip. LEXIS 3 (FINRA NAC Feb. 25, 2014) ................................................. 26, 36

Federal Rules and Guidelines

17 C.F.R. § 201.45l(a) .................................................................................................................. 16

17 C.F.R. § 240. l 5c3-l (a)(2)(iii) .............................................................................................. .4, 17

FINRA By-Laws, Guidelines, Notices, and Rules

FINRA By-laws, Article V, Section 4(a) ..................................................................................... .35

FINRA Rule 8210 ...................................................................................................................... 9, 25

FINRA Sanction Guidelines (2013 ed.) ................................................................................... 29, 35

NASD Notice to Members 99-77, 1998 NASO LEXIS 49 (Sept. 1999) ........................................ 24

NASD Notice to Members 07-16, 2007 NASO LEXIS 36 (Apr. 2007) ......................................... 20

NASO Rule IOI l(k)(3) ................................................................................................................. 23

NASO Rule 1017 ........................................................................................................................... 22

Miscellaneous

FINRA lnterp. Of Fin and Op. Rules, at 1 (2008), available at http://www.finra.org/sites/default/files/SEA.Rule_.15c3-I .Interpretations.pdf ...................... 17, 20

- 111 -

HEFORETHE

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC

In the Matter of the Application of

Rani T. Jarkas

For Review of Disciplinary Action Taken by

FIN RA

File No. 3-16948

FINRA'S BRIEF IN OPPOSITION TO THE APPLICATION FOR REVIEW

I. INTRODUCTION

Rani T. Jarkas ("Jarkas") appeals an October 5, 2015 decision in which FINRA 's

National Adjudicatory Council ("NAC") barred him from associating with a FINRA member in

all capacities for his failure to appear for on-the-record testimony, in violation of FINRA Rules

8210 and 2010. FINRA sought on-the-record testimony from Jarkas on two separate occasions.

Jarkas failed to appear for his on-the-record interviews on November 11 and November 30,

2009, in violation of FINRA rules. In its decision, the NAC also found that Jarkas allowed his

firm, Global Crown Capital, LLC ("Global Crown" or "Firm"), to operate as a securities

business with insufficient net capital and failed to file an application for approval of a material

change in the Firm's business operations, in violation of the net capital rule, FINRA Rule 2010,

and NASD Rules 1017 and 21 IO. The NAC found Jarkas' misconduct egregious, and thus

assessed additional sanctions against him, including a two-year suspension in all capacities and

$50,000 fine for his net capital violation; and a 30 business-day suspension in all capacities and

$5,000 fine for his NASO Rule I 017 violation. In light of his bar sanction for failing to ~ppear

for on-the-record testimony, the NAC did not impose the additional sanctions.

The importance of obtaining Jarkas' testimony cannot be overstated. His testimony was

FINRA's last chance to obtain critical information related to unreported outstanding tax liens

afler FIN RA staff had sent nine FIN RA Rule 8210 requests for documents and information, to

which Jarkas provided only incomplete and partial responses. FINRA gave Jarkas two

opportunities to appear and testify on-the-record, and he received proper notice. Jarkas had an

unequivocal obligation to cooperate in FINRA's investigation, yet he failed to appear for

testimony on both occasions.

In barring Jarkas, the NAC found that there were no mitigating circumstances that

excused his failure to appear for testimony. The NAC recognized that in the years leading up to

FINRA 's requests to appear, Jarkas had faced a serious and potential life-threatening medical

condition. The NAC did not find evidence in the record, however, that Jarkas' medical condition

was an excusable defense to his failure to appear for on-the-record testimony. During the

relevant period, Jarkas was in "complete remission" according to his medical records and

working professionally overseas in the Cayman Islands. He worked as a business consultant for

Cedrus Investments Ltd.-an affiliated investment firm-which required him to travel across the

world, including Lebanon and Asia. Even if his medical condition prevented him from

appearing for testimony-which the evidence shows that it did not-Jarkas was obligated to

inform the staff and arrange for a "mutually acceptable" rescheduled date, which he failed to do.

The NAC's decision is fully supported by the record. Based on several aggravating

factors, and no mitigating ones, the NAC followed FINRA's Sanction Guidelines ("Guidelines")

and imposed a bar. For the reasons set forth in this brief, we respectfully ask the Commission to

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follow firmly rooted case precedent and affirm the NAC's findings of violation and the sanction

it imposed.

II. STATEMENT OF FACTS

A. Jarkas' Background.

Jarkas was associated with several FINRA member firms before he acquired Global

Crown-a small registered broker-dealer and investment adviser firm-in 2002. 1 RP 249 I-

2518.2

As the co-owner and general securities principal of Global Crown, .Jarkas held various

profossional titles, including chief executive officer. RP 8. Jarkas managed the day-to-day

operations of the Firm, such as opening the mail, signing checks, and hiring and firing

employees, and he was the only person who had full access to the Firm's bank accounts, general

ledger, and financial records. RP 11, 906, 1356-1357, 2229. In addition to managing the Firm,

Jarkas was the broker of record for certain institutional accounts and a small number of retail

accounts. RP 446, 906.

B. Global Crown's Net Capital and NASD Rule 1017 Filing Deficiencies.

This case derived from two examinations conducted by FIN RA' s Member Regulation

Department ("Member Regulation"). The first examination in 2008 found that, from August 1 to

September 30, 2008, Jarkas caused 30 securities positions to be held in the Firm's average price

During the relevant period, Global Crown was a general securities business primarily located in San Francisco, California, that, among other things, was approved to engage in the sale of corporate debt and equity securities, mutual funds, private placements, and U.S. government securities. See RP 2803, 5209. Jarkas entered the securities industry in July 1995. RP 7, 5100.

2 References to "RP" are to the pages in the certified record filed by FINRA in this matter.

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account overnight, and, in some cases, for several days. 3 Although the average price account

was a Firm account designed solely to facilitate customer transactions at reduced commissions

and fees, the Member Regulation staff found that, for several weeks, Jarkas instructed his senior

director of operations, Philip Flotow ("Flotow"), to execute 30 securities transactions that were

not attributed to a particular customer order or customer account.4 The staff thus concluded that

these transactions constituted proprietary trades.

Global Crown, however, was not approved by FINRA to conduct proprietary trading. Per

the Firm's membership agreement, Global Crown was required to maintain a minimum net

capital of $50,000. RP 2803. To conduct proprietary trading, the net capital rule requires a

broker-dealer to maintain a higher minimum net capital level of $100,000, a level at which the

Firm fell significantly short.5 Accordingly, the proprietary trades held in the average price

account triggered net capital deficiencies that were attributable to Jarkas' own missteps.

Specifically, Jarkas violated the net capital rule when he operated a securities business on August

27, August 29, September 29, and September 30, 2008, while failing to possess the adequate net

3 Global Crown had an account through its clearing firm, Penson Financial Services, Inc. ("Penson Financial"), known as an "average price account," that permitted Firm registered representatives to buy and sell securities in small increments throughout the trading day and then allocate those positions to one or more customers at, or after, the market close using a volume weighted average price. RP 5549.

4 RP 5550. Flotow was responsible for allocating trades in the Firm's average price account at the end of the trading day to the designated customer account. J arkas and Flotow were the only people who could enter trades in the average price account. RP 448, 113 7, 5100.

5 See Exchange Act Rule 15c3-l(a)(2)(iii) (stating that a "dealer," defined as "[a]ny broker or dealer that effects more than ten transactions in any one calendar year for its own investment account[,]" shall maintain net capital of not less than $100,000). 17 CFR 240.15c3-l(a)(2)(iii).

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capital at the Firm to engage in proprietary trading. Following is an approximation of the Firm's

net capital deficiencies based on the higher minimum net capital required:

Date Net Capital Minimum Net Actual Net Actual Excess (Firm Capital Capital (Staff Net Capital Calculation) Required Calculation) (Staff

Calculation)

August 27, 2008 $100,000 ($86,606.97) ($186,606. 97) August 29, 2008 $99,871.31 $100,000 $93,097.89 ($6,902.11) September 29, 2008 $100,000 ($63,892.08) ($163,892.08) September 30, 2008 $185,504.27 $100,000 ($290, 192.03) ($390, 192.03)6

Additionally, Jarkas violated NASO Rule 1017 by failing to file a continuing

membership application, in accordance with the rule, to notify FINRA of a material change in

the Firm's business operations at least 30 days prior to engaging in proprietary trading. RP

5560; see also RP 3303 (providing the stairs report of examination, including details of Global

Crown's net capital violations).

The second examination-which in part ran concurrently with the 2008 examination-

found that, in 2009, J arkas failed to report an outstanding tax lien issued by the Internal Revenue

Service ("IRS") against him and the Firm. RP 5304. The IRS tax lien resulted from Jarkas'

failure to pay the Firm's payroll taxes. RP 900. Jarkas' outstanding tax lien was brought to the

staffs attention via a Notice of Levy ("IRS Notice") that the IRS sent to FINRA in April 2009.

RP 2923, 5303-5304. The IRS Notice indicated that Global Crown and Jarkas owed the IRS a

total of $244,246.07 in unpaid taxes. RP 2923, 5551. This unreported IRS tax lien was not

recorded as a liability and caused an overstatement in the Firm's net capital computation for

quarters ending December 31, 2008, and March 31, 2009. RP 5112.

6 RP 4723.

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After receiving the IRS Notice, the staff immediately commenced a special FINOP

examination to determine the impact of the outstanding tax lien on the Firm's net capital

position, which included contacting Jarkas and other Firm representatives on April 27, 2008 to

discuss the IRS Notice. RP 5551. Jarkas claimed at the time that he had no previous knowledge

about the IRS payroll tax lien, and that he would address it immediately. RP 2261, 5551. On

April 28, 2009, Jarkas arranged for a deposit of $249, 980 in the Firm's operating account via a

wire from his silent business partner's bank account overseas. RP 5551. He also provided the

staff with a self-created document, suggesting that the Firm made a partial payment to the IRS in

the amount $45,624. 74. 7

FINRA staff sought to verify the source of funds and, on April 28, 2009, sent a letter

requesting that Jarkas provide supporting documentation and information related to the IRS

payroll tax liability. RP 3429-3432, 5551-5552. Jarkas responded to FINRA's request letter on

the same day, but his responses were either incomplete or he outrightly refused to provide

FINRA with the requested documents and information. See e.g. RP 3434, 3457.

FINRA staff used the financial information it had on Global Crown to recalculate the

Firm's net capital position and found that the Firm had operated with insufficient net capital on

7 Specifically, in his August 28, 2009 response letter, Jarkas provided FINRA with two documents in connection with the IRS tax lien, including a single paged self-created document indicating that $45,624.74 was withdrawn from the Firm's operating account and paid to the IRS, thereby reducing the payroll tax liability. RP 3451, 3457. The self-created document, however, included no supporting documentation or further details regarding the IRS payment, such as a canceled check, dates of withdrawal or payment, or other bank verification showing that the $45,624.74 was, in fact, withdrawn from the Firm's operating account. RP 3457.

-6-

March 31, April 27, and April 28, 2009 in violation of the net capital rule. 8 An approximation of

the Firm's net capital deficiency based on the Firm's outstanding tax liabilities is noted as

follows:

Date Net Capital Minimum Net Actual Net Actual Excess (Firm Capital Capital (Staff Net Capital Calculation) Required9 Calculation) (Staff

Calculation)

March 31, 2009 $100,356 $36,627.09 ($358,775.31) ($395.402.40) April 27, 2009 $35,046.22 ($360, 704.02) ($395,750.24) April 28, 2009 $166,414.36 $34,320.00 ($110,285.33) ($144,605.33)!0

C. Jarkas Refuses to Provide Requested Information.

In connection with the 2009 examination, FINRA sent Jarkas and Global Crown a series

of nine letters pursuant to FINRA Ruic 82 I 0 repeatedly requesting documents and information

related to the IRS tax lien to determine the extent of the Firm's unreported tax liabilities and to

consider whether any additional net capital violations had occurred. RP 3429-3422, 3467-3470,

3471-3472, 3475-3480, 3481-3482, 3483-3488, 3489-3492, 3493-3498, 3499-3500, 3503-3530.

8 The FINRA examiner responsible for computing the Firm's net capital, David Lee ("Lee"), testified that he used the Firm's independent audit report, as well as any known unreported outstanding liabilities as of the date of calculation, to recalculate the Firm's net capital. RP 1463, 1465-1503. During its examination, the staff learned of an additional past judgment and federal tax liens imposed against Jarkas and Global Crown that also went unreported as liabilities on the Firm's books and records. RP 1465-1503.

9 Lee testified that for the 2009 examination, the staff was "conservative" and recalculated the Firm's net capital using the 6-2/3% of the Firm's aggregate indebtedness in lieu of $50,000 dollar amount to dete1mine the minimum net capital required. RP 1477-1480. See generally Net Capital Rule, Exchange Act Release No. 28927, 1991 SEC LEXIS 332, at *6 (Feb. 28, 1991) ("The net capital rule requires a registered broker-dealer conducting a general securities business to maintain net capital in excess of the greater of $25,000 or 6 2/3 percent of its liabilities and other obligations (basic or aggregate indebtedness method)").

10 RP 463, 4 723. We note that some of FINRA' s Department of Enforcement's ("Enforcement") estimated figures were adjusted since the complaint was filed.

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Despite the staffs repeated requests, Jarkas never produced the requested documentation to

support his claim that the IRS tax lien was satisfied, at least partially. RP 5306.

Broadly speaking, Jarkas' cooperation with FINRA staff had deteriorated during the 2009

examination. 11 Towards the end of 2008, Jarkas replaced the Firm's former general counsel,

Henry Carter e'Carter"), with Melvin Patterson ("Patterson"), an attorney who was initially

retained on a temporary basis to handle the Firm's increasing commercial litigation matters. 12

Patterson, however, was not a securities attorney. 13 Instead of cooperating with the stafrs

investigative process, Jarkas, through Patterson, restricted FINRA 's access to critical information

needed to complete its examination. 14 Jarkas also restricted Carter's access to the Finn's books

and records and financial information. Carter testified that he could not have communication

with any regulator without going through Patterson and Jarkas first. RP 1354.

Jarkas repeatedly attempted to thwart FINRA's investigation. FINRA examiner

Christopher Simmers testified that the examination staff were refused entry to the Firm's

premises on May I, 2009, and could not conduct their onsite examination. RP I 252- I 254.

II According to Enforcement: "Beginning in May 2009 the firm basically ceased cooperating with the FINRA examination. It incorrectly claimed that it had already produced documents. And the firm also took the position that information regarding its own taxes was confidential, and it refused to provide any such information to FINRA." RP 905.

12 Carter remained employed with Global Crown focusing solely on compliance matters, while Patterson became the Firm's general counsel. RP I 713.

13 When asked in testimony before the Hearing Panel whether Patterson considered himself.-at the time he was hired, or presently-to be a securities lawyer, Patterson candidly replied: "No, I do not." RP 1713.

14 For example, in response to the staffs request for information related to a customer account of Jarkas' family member, in a letter dated April 17, 2009, Patterson incorrectly asserted privacy rights of the Firm's customer records under California state law and refused to provide the requested information. RP 3427-3428.

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.Jarkas threatened to withhold customer and other Firm records unless the staff permitted him to

continue conducting his securities business. See RP 3611-3612.

Even after the Firm resumed its operations, Jarkas continued to evade FIN RA 's

investigation. For example, in a letter dated October 20, 2009, Jarkas, through Patterson, failed

to respond to and provide documentation for eaclt a11d every item requested by the staff. RP

3531-3534. Patterson asserted irrelevant privacy protection claims on Firm records, and with

respect to FINRA's request of the Firm's proof of the $45,624.74 payment to the IRS, Patterson,

incorrectly.responded that "information related to the Firm's taxes is private and confidential and

the Firm declines to provide any information related to its taxes." RP 3427-3428. For several

months following the commencement of the stafrs 2009 examination, Jarkas never provided

complete responses to FINRA's requests for information.

D. Jarkas Fails to Appear for On-The-Record Testimony.

After several failed attempts to obtain complete responses through written requests for

documents and information issued under FINRA Rule 8210, the staff requested Jarkas, pursuant

to FINRA Rule 8210, to testify under oath. 15 Accordingly, FI NRA sent two letters pursuant to

FINRA Rule 8210 requesting Jarkas to appear for on-the-record testimony on November 11 and

November 30, 2009, respectively. RP 3563-3564, 3581-3592. Jarkas failed to appear and testify

on both requested dates.

Along with providing details of the date and location of testimony, FINRA's first request

letter, dated October 21, 2009, provided that if Jarkas was unable to appear for testimony on the

15 FINRA Rule 8210 provides the staff the right to require associated persons to "testify at a location specified by FINRA staff, under oath or affirmation administered by a court reporter or a notary public if requested, with respect to any matter involved in the investigation, complaint, examination, or proceeding." FINRA Rule 8210(a)(l).

- 9 -

date scheduled, he should contact FINRA and "agree on another mutually acceptable date and

time." RP 3563. The letter also stated: "Unless and until a postponement is agreed to, you are

still obligated to appear on the date and at the time specified in this letter." RP 3563. Jarkas did

not reschedule his testimony date, and failed to appear for testimony on November 11, 2009.

FINRA 's second request letter, dated November I 2, 2009, informed Jarkas that he failed

to appear for testimony, as required, and requested that he appear for his on-the-record interview

on a new scheduled date. RP 3581. The second request letter provided the same instructions to

Jarkas as the first, and it explicitly warned him that his failure to appear on the date scheduled

could subject him to a FINRA disciplinary action and the imposition of sanctions, including a bar

from the securities industry. RP 3581-3583. Jarkas did not contact FINRA to reschedule his on­

the-record interview, and he failed to appear for testimony on November 30, 2009.

E. Jarkas' Medical Condition.

In January 2008, J arkas was diagnosed with a serious medical condition, and became

gravely ill. RP 1359, 5212, 5553. In July 2008, due to complications, Jarkas was

for several days and he spent a considerable amount of time in the hospital. By August

2008, Jarkas went back to work, on a limited basis, RP 52 I 3, and over the course of several

months that followed, Jarkas spent a considerable amount of time recovering from his condition.

RP 5553. By March 2009, Jarkas' medical record indicated .

RP 4793.

In May 2009, Jarkas was diagnosed with another related medical condition that

. Although Jarkas went to the doctor in or around July 2009, he testified that

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16 His medical record in .July 2009 indicated

RP 4796. It also stated that Jarkas

had . RP 4 796.

Jarkas however. RP 4799, 4801. He instead resumed

his business and family Iife. 17 Indeed, .Jarkas testified that. during the time he was required to

appear for testimony, he "was in the Cayman Islands frequently for vacation and recreation" to

"relax and take it easy." RP 2217. Jarkas also admitted that he continued to work, including

traveling for business purposes, and consulting for Cedrus Investments Ltd., a Cayman Island

investment firm, with which he was aniliatcd. 18 According to Jarkas, he traveled "many times"

out of the country to different parts of the world, including Lebanon and Asia. RP 2218-2219.

Jarkas' vacationing and travels occurred near the time of FINl{A 'son-the-record testimony

requests in November 2009. Jarkas ultimately

, which was several months after he failed to appear for on-the-record testimony.

16 See RP 2249 (Jarkas testifying: . . .

).

17 See RP 4802 (reporting by Dr. Fayad of Jarkas' then medical condition

") ...

18 RP 2217-2218. Jarkas' testimony is corroborated by his medical report in February 2010, which stated that

." RP 4801. It also referred to Jarkas as " RP 4802. A July 2009 press release announced that Cedrus Investments Ltd. had acquired Global Crown's institutional business and Jarkas testified to his involvement with the acquisition. Between March and September 2009, the Firm's operations were winding down, and Jarkas testified to his continued involvement in Global Crown's business activities before it ceased operations in September 2009. RP 2250.

- 11 -

III. PROCEDURAL BACKGROUND

On April 20, 2011, Enforcement filed a six-cause complaint against two respondents,

including Jarkas. RP 1-26; see also RP 5548, n. 5. The allegations in the complaint involved

three causes of action against Jarkas. Specifically, Enforcement alleged that Jarkas allowed

Global Crown to conduct a securities business without maintaining sufficient net capital, in

violation of NASO Rule 2110 and FINRA Rule 2010. RP 14. Enforcement further alleged that

Jarkas failed to file an application with FINRA for approval of a material change in the Firm's

business operations, in violation of NASO Rules 1017 and 2110. RP 19. Finally, Enforcement

alleged that Jarkas failed to appear for on-the-record testimony on two separate occasions, in

violation of FINRA Rules 8210 and 20 I 0. RP 20-21.

The Hearing Panel issued a decision on February 7, 2014. RP 5097-5120. The Hearing

Panel found that Enforcement proved by a preponderance of evidence that J arkas had committed

the alleged violations. RP 5120. In noting that Jarkas directly caused proprietary trading in the

average price account and the Firm's outstanding payroll tax liabilities, the Hearing Panel

rejected Jarkas' contention that, because he was not the FINOP, he should not be responsible for

the Firm's net capital deficiencies. RP 5112. The Hearing Panel also rejected Jarkas' claim that

he was not required to testify because he had already testified and that he had relied on his

attorney's advice in this regard. RP 5116. Most notably, the Hearing Panel found that Jarkas'

medical defense in failing to appear for testimony lacked merit because J arkas "failed to

establish that he was medically unable to appear for testimony in the fall of 2009 when he

received the request." RP 5116. The Hearing Panel barred Jarkas for his failure to appear for

on-the-record testimony in violation of FINRA Rule 8210, and chose not to impose further

sanctions for his other violations. RP 5120. In assessing the appropriate sanction, the Hearing

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Panel considered the Guidelines and found that none of Jarkas' claims of mitigation-including

his reliance on counsel and medical defenses-justified a lesser sanction than a bar for his failure

to respond to FIN RA 's requests. RP 5118-5120.

Jarkas appealed the Hearing Panel's decision to the NAC. The NAC independently

reviewed the record and affirmed the Hearing Panel's findings that Jarkas caused Global Crown

to violate the net capital rule, failed to file a continuing membership application to obtain

approval for the Firm's proprietary trading, and failed to appear and provide on-the-record

testimony. RP 5547-5570. In rejecting Jarkas' claims that he did not intend for the Firm to

conduct proprietary trading, the NAC affirmed the Hearing Panel's finding that Jarkas' directly

caused the Firm's increased net capital requirement due to his routine practice of executing

trades in the average price account without attributing those trades to a customer or customer

account, and thus was liable for the Firm's resulting net capital deficiencies. RP 5557. The

NAC also rejected a host of defenses that Jarkas' raised concerning his net capital violations that

arose from his failure to report the IRS tax liens. RP 5558. The NAC concluded that Jarkas

either knew-or was in the best position to have known-about the IRS tax liens and failed to

ensure that they were reflected appropriately in the Firm's books and records, and net capital

computation. RP 5558-5559.

The NAC rejected Jarkas' claim on appeal that he failed to appear for testimony because

he understood from his attorney, Patterson, that his nonappearance for testimony was somehow

agreed upon by, and acceptable to, FINRA staff. RP 5562. The NAC found that Jarkas' claim

lacked evidentiary substantiation, and thus was unpersuasive. RP 5562. Lastly, the NAC

thoroughly considered the timeline of events during the fall of 2009 when the staff sent requests

for Jarkas to appear for testimony. The NAC affirmed the Panel's finding that Jarkas failed to

- 13 -

substantiate his claim that prevented him from testifying at that time. RP

5563.

The NAC barred Jarkas from association with any FINRA member firm in any capacity

for his failures to appear and found that his sanction was consistent with the Sanction Guidelines.

RP 5569. The NAC assessed additional sanctions against Jarkas for his net capital and NASD

Rule I 017 violations, but did not impose them in light of the bar. RP 5563. This appeal before

the Commission followed.

IV. ARGUMENT

The evidence in the record overwhelmingly shows that Jarkas is liable for causing his

Firm to violate the net capital rule, failing to file a continuing membership application, and

failing to appear for on-the-record testimony. Regarding his net capital violations, there is no

question that, from August through September 2008; and again from March through April 2009,

Jarkas' own actions caused the Firm to violate the net capital rule. It is undisputed that Jarkas

caused the execution of a series of securities transactions in the Firm's average price account and

provided his senior director of operations no identifying customer name or account for the

allocation of those positions. Over the course of several weeks, securities positions in the

average price account were liquidated into the market thereby attributing profits and losses to the

Firm. Jarkas knew that his Firm was not approved to conduct proprietary trading. His

proprietary trading caused the Firm's minimum net capital requirement to increase from $50,000

to $100,000, which triggered net capital deficiencies, and a filing requirement under NASD Rule

1017.

Jarkas also knew or should have known that his Firm failed to pay payroll taxes, which

caused an IRS tax lien against him and the Firm. He was the sole manager and control person at

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the Firm, and the IRS Notice of Levy was addressed to him directly. Yet, his disregard for the

unpaid taxes caused additional net capital deficiencies that went unreported in the Firm's

FOCUS filings and net capital computation for two fiscal quarters.

Regarding his FINRA Rule 8210 violation, Jarkas failed on two scheduled dates to

appear for on-the-record testimony in violation of FINRA Rule 8210. Undisputedly, Jarkas as an

associated person agreed to comply with, and remain subject to, FINRA 's rules. Jarkas'

misconduct occurred when he was an associated person of a FINRA member, and FINRA

retained jurisdiction over his conduct for up to two years after termination of his registration.

With over 14 years in the securities industry, .Jarkas should have known that his dissolution of

Global Crown and termination of his registration did not automatically conclude the staffs

investigation into his net capital and other financial reporting deficiencies. Thus, he was

required under FINRA rules to cooperate and appear for on-the-record testimony when requested

by the staff.

There was no miscommunication about his obligations to appear for testimony pursuant

to FINRA Rule 8210. Both of FINRA's request letters provided clear instructions on his

obligations, including what to do if Jarkas was unable to appear on the scheduled dates. Jarkas

provided no empirical evidence that he suffered from any physical or psychological impairment

that prevented him from testifying on the requested dates. Nevertheless, at his hearing, Jarkas

instead claimed that he relied on his attorney's advice not to appear for testimony because he

already testified previously in connection with the staffs 2008 examination. RP 5119. This

excuse, however, has nothing to do with Jarkas' medical condition or the fact that he believed

that FINRA staff gave his counsel a noncommittal "okay"-both reasons Jarkas raised in his

NAC appeal as to why he did not appear.

- 15 -

Jarkas undeniably committed the FINRA rule violations as alleged and he was barred

from the industry. The NAC found that as the Firm's chief executive officer and owner, Jarkas

was in the best position to ensure the Firm's and his own compliance with all applicable rule

requirements. Yet he failed to do so. For his net capital and NASO Rule 101 violations, the

NAC assessed additional sanctions against Jarkas, noting the seriousness of his misconduct. In

barring Jarkas for his FINRA Rule 8210 violation, the NAC considered Jarkas' flagrant disregard

for his obligation to cooperate during a FINRA investigation and found that a bar is appropriate

in ensuring investor protection and deterring future misconduct. The Commission should sustain

the NAC's decision in all respects. 19

A. The Record Overwhelmingly Supports the NAC's Findings of Misconduct.

1. Jarkas Engaged in a Securities Business in Violation of the Net Capital Rule.

The evidence overwhelmingly supports the NAC's findings that Jarkas caused Global

Crown to operate as a securities business in violation of the net capital rule and FINRA Rule

20 I 0.20 A primary purpose of the net capital rule is to establish "fundamental safeguards"

designed to "protect customers and other market participants from broker-dealer failures and to

enable those firms that fall below the minimum net capital requirements to liquidate in an orderly

19 Jarkas has requested oral argument in connection with his application for review. FINRA believes that the issues raised in this application can be determined sufficiently on the basis of the record and the briefs filed by the parties, and therefore opposes Jarkas' request pursuant to Rule 45l(a) of the Commission's Rules of Practice. See 17 C.F.R. § 201.45l(a).

20 A violation of the net capital rule also violates FIN RA Rule 2010, which requires members and associated persons in the conduct of their business to observe high standards of commercial honor and just and equitable principles of trade. Fox & Co. lnvs., Inc., 58 S.E.C. 873, 883 (2005) (finding respondent conducted a securities business without sufficient net capital, in violation of Exchange Act Rule l 5c3-l and NASO Rule 2110).

- 16 -

fashion without the need for a formal proceeding or financial assistance from the Securities

Investor Protection Corporation." Fox, 58 S.E.C. at 884, 897. The NAC found Jarkas liable for

the Firm's net capital deficiencies because he directly caused the failures in complying with the

requirements of the net capital rule. 21

With respect to the Firm's average price account, it is incontestable that Jarkas executed

transactions that were not customer orders, and caused 30 securities positions to be held in the

account for periods of up to seven business days before either allocating the positions to a

customer,s account, or, in some cases, liquidating the securities positions without a customer

allocation. Ignoring Firm procedures, Jarkas made it a practice to instruct Flotow to open and

close securities positions in the average price account without attributing orders to a particular

customer and, therefore causing the Firm to engage in proprietary trading.

Pursuant to Exchange Act Rule 15c3-l (a)(2)(iii), a broker-dealer that effects more than

I 0 proprietary transactions in any one calendar year is generally required to have a minimum net

capital of $100,000.22 As a $50,000 minimum net capital broker-dealer, Global Crown did not

possess the required minimum amount of net capital of $100,000 to engage in proprietary

trading. Jarkas thus caused the Firm to violate the net capital rule by executing securities

transactions while the Firm was below its net capital requirement.

21 See RP 5550, n. 7 (noting that the Firm's written supervisory procedures required that all customer orders be identified by customer or account name prior to execution); see also RP 2812.

22 See 17 CFR 240. l 5c3-1 (a)(2)(iii); see also FINRA lnterp. of Fin. and Op. Rules 1, 23 (2008), available at http://www.finra.org/sites/default/files/SEA.Rule _.15c3-l .Interpretations.pdf (noting that for purposes of counting the ten transactions, buy and sell transactions are each individually counted as one transaction even if the buy and sell transactions are for the same security).

- 17 -

Regarding the Firm's outstanding IRS tax liens, the record also abundantly supports the

NAC's findings that Jarkas allowed the Firm to conduct a securities business with insufficient

net capital from March to April 2009 in violation of the net capital rule. At the time, Jarkas and

Global Crown owed the IRS a total of $244,246.07 in unpaid payroll taxes. RP 2923. The

staffs review of the Firm's FOCUS reports for the quarters ending December 31, 2008 and

March 31, 2009 revealed that the IRS tax liabilities went unreported in the Firm's financials and

net capital computation, which resulted in a gross overstatement of the Firm's capital. RP 3265-

3284.

In his brief, Jarkas raises the same defenses against his net capital liability that he argued

in his NAC appeal. Applicant Brief~ at 19-21. He first claims that the Firm's part-time FINOP,

William Carson ("Carson"), and not Jarkas, was responsible for ensuring compliance with the

net capital requirements. Applicant Brief, at 20. While it is true that a FINOP's role is to ensure

that the Firm complies with applicable net capital, recordkeeping and other financial and

operational rules, the record shows that it was Jarkas-and not Carson-who was in the best

position to be aware of the Firm's net capital deficiencies and resulting reporting obligations.

Not only was Jarkas the Firm's chief executive officer and thus responsible for his Firm's

compliance with all applicable requirements, see Kirk A. Knapp, 51 S.E.C. 115, 126 (1992)

(holding the president of a brokerage firm responsible for net capital compliance as the controller

and operator of the firm's operations), J arkas admitted himself that his actions unilaterally

- 18 -

caused the net capital deficiencies. RP 2311-2318.23 For several weeks, Jarkas intently

instructed his director of operations, Flotow, to execute proprietary trades in the average price

account-a Firm account-and held 30 securities positions in that account for several days-

ultimately liquidating the positions without attributing the orders to a customer or customer

account.

Although Jarkas argues in his brief that he had no knowledge of the IRS tax liens until

FINRA staff contacted him on April 27, 2009 (Applicant Brief, at 21 ), the evidence

unequivocally shows that the IRS Notice of Levy was directly addressed to, and issued against,

Jarkas. RP 2423. On the same day that Jarkas spoke with FINRA staff about the IRS tax liens,

Jarkas produced in his response to FINilA 's Ruic 8210 request letter, a self-created document

demonstrating that $45,624.74 was paid to the IRS. RP 3457. Although Jarkas never

substantiated the payment with supporting documentation, his quick response to FINRA's

request suggested that a payment had already been made to the IRS-and thus demonstrated that

Jarkas either knew, or should have known, about his and his Firm's IRS tax liabilities.

Carson, on the hand, testified that he had no knowledge of the IRS tax liens, RP 1642,

1650, 1654, and upon receiving notification of them, immediately terminated his position as the

Firm's FINOP. RP 2763-2766. Notwithstanding this, as the chief executive officer of Global

Crown, Jarkas was responsible for managing the Firm's operations and regulatory compliance.

23 See e.g., RP 2311-2312 (Jarkas testifying: "Q. So when Mr. Flotow testified that you often placed trades in the average price account without telling him for which customer or customer those trades were intended, he was not teiling the truth. Is that right? A. 'Often' is not accurate. Did it happen sometimes? Maybe. It's possible, yes."); see also RP 2314 (J arkas testifying: "Q: And some of these positions were closed out without making allocations to anyone. Isn't that correct? A. Correct. . . . some trades were not allocated in the average price account, and I think they force sold them at the time ... ").

- 19 -

"Officers of securities firms bear a heavy responsibility in ensuring that the firm compl[ies] with

all applicable rules and regulations[,] including the duty of ensuring that the firm comply with

the net capital requirement." Fox & Co. lnvs., Inc., 58 S.E.C. at 889 (internal quotations and

citations omitted).

Second, Jarkas argues that his net capital violations were violations "only in the most

technical sense," and that it is not unusual for a firm's net capital position to fluctuate widely on

a daily basis. Applicant Brief: at 20. Not only is Jarkas incorrect in his depiction of the net

capital rule, but he disdainfully mischaracterizes the facts in this case. As the SEC has held, "the

net capital rule is one of the most impo11ant weapons in the Commission's arsenal to protect

investors." Fox, 58 S.E.C. at 897 (internal quotation marks omitted). "Every broker or dealer

must at all times have and maintain net capital no less than the greater of the highest minimum

requirement applicable to its ratio requirement. "24

Indeed, the net capital rule is not just a technical rule, but includes "fundamental

safeguards imposed for the protection of the investing public on those who wish to engage in the

securities business." Id. As the Firm's principal and owner, Jarkas was required to ensure that

the Firm had adequate capital. His financial obligations were not fleeting, but ongoing.25 Global

Crown's net capital deficiencies were not mere byproducts of daily market fluctuations-but

instead resulted from Jarkas' continual failures to ensure the Firm's compliance with the rule.

24 See FINRA Jnterp. of Fin. and Op. Rules, at 23. [Emphasis added.]

25 As noted in the NAC decision, the net capital rule requires "moment-to-moment" compliance, which means that at any moment firms must be able to demonstrate compliance consistent with its business activities as of the date and time the net capital computation is performed. See NASD Notice to Members 07-16 (Apr. 2007), 2007 NASD LEXIS 36, at *1 (noting that the net capital rule requires a broker or dealer to maintain its required net capital continuously).

-20-

Third, Jarkas claims in his brief that he gave most of his day-to-day responsibilities in

running the Firm to his director of compliance, Carter, while he was undergoing medical

treatment. Applicant Brief, at 21. As the NAC correctly ruled, Jarkas cannot shift his

responsibility and blame Carter for the Firm's net capital deficiencies. RP 5560. Although

Jarkas was faced with a serious medical condition, the record reflects that Carter had a very

limited role in preparing the Firm's financial statements and had restricted access to the Firm's

books and records. RP 1354. As Cmier testified: "Financial information was always restricted.

I was always restricted from seeing things behind the [FOCUS] report. I was told that was not

my department." RP 1354.

Jarkas produced no evidence showing that Carter had access to the Firm's bank account

and finances. The record does reflect, however, that Jarkas made significant capital

contributions to the Firm during the relevant period, which demonstrates his direct involvement

and ongoing knowledge of the Firm's financial condition.26 Jarkas therefore cannot blame Carter

for the Firm's net capital deficiencies. i.S'ee Knapp, 51 S.E.C. at 134 (finding that participants in

the industry must take responsibility for their compliance obligations which "cannot be excused

by pointing the finger of blame at employees who do not have the authority to prevent the

alleged violations").

2. Jarkas Failed to File a Continuing Membership Application in Violation of NASD Rules 1017 and 2110.

It is also undisputed that Jarkas failed to file a continuing membership application as

required by NASD Rule 1017. The NAC therefore correctly found that Jarkas violated NASD

26 Specifically, from February 2008 through April 2009, Jarkas made capital contributions to Global Crown almost on a monthly basis, totaling $658,000. See RP 1860-1861.

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Rules 1017 and 21 10 by failing to file an application to, and obtain approval by, FIN RA at least

30 days prior to engaging in proprietary trading.27 RP 5560-5561. NASO Rule 1017 ensures

that member firms are approved by FINRA to conduct certain business activities before engaging

in them.28 The rule requires firms to file an application and receive FINRA approval upon

certain material events or changes occurring to its ownership, control or business operations. See

NASO Rule 10 l 7(a). One such significant event or change that requires FINRA approval occurs

when a firm engages in a business activity, such as proprietary trading, that triggers a higher

minimum net capital requirement. See NASO Rule 1017(a)(5).

Per Global Crown's membership agreement, which Jarkas signed, FINRA approved the

Firm to engage in a number of business activities. 29 Proprietary trading, however, was not one

of them. Jarkas' proprietary trading from August through September 2008 constituted a material

change in the Firm's business operations that required an approval by application to FINRA

pursuant to NASO Rule 1017. NASO Rule 101 l(k) defines a "material change in business

operations" to include, in relevant part, "business activities that require higher minimum net

27 "It is well established that a violation of other NASO rules or securities laws or regulations also constitutes a violation of Rule 2110." Kirlin Sec. Inc., Exchange Act Release No. 61135, 2009 SEC LEXIS 4168, at *65 (Dec. 10, 2009).

28 See generally NASD Rule I 017 (Application for Approval of Change in Ownership, Control, or Business Operations).

29 On June 9, 2003, Jarkas signed Global Crown's membership agreement. RP 2803-2804. At that time, he undertook to operate the Firm's business pursuant to Exchange Act Rule 15c3-3(k)(a)(iv) as an introducing broker-dealer with a minimum net capital of $50,000. He also undertook to file a written notice and application with FINRA pursuant to NASO Rule I 017 at least 30 days before effecting a material change in its business operations as defined under NASO Rule I 011 (k). RP 2803-2804.

- 22-

capital under SEC Rule l 5c3- l. " 30 .Jarkas' proprietary trading in the average price account is the

exact circumstance that NASO Rule I 017 is designed to address. His proprietary trading caused

the Firm's minimum net capital to increase from $50,000 to $100~000, and thereby triggered the

corresponding notice and filing of an application pursuant to NASO Rule 1017. It is undisputed,

however, that Jarkas failed to file the required application on his Firm's behalf. The NAC

therefore correctly found that Jarkas violated NASO Rules I 017 and 21 I 0 by failing to file an

application to, and obtain approval by, FIN RA at least 30 days prior to engaging in proprietary

trading. RP 5560-5561.

In his brief, Jarkas argues that it is "perfectly appropriate for a firm to maintain an

average price account" and that a 44fJNRA member firm may engage in proprietary trading."

Applicant Brief, at 22. These general statements arc beside the point. The pertinent issue at

hand is whether Global Crown was authorized to conduct proprietary trading in the Firm's

average price account-which it was not. The average price account was designed solely to

facilitate the buying and selling of securities for customer accounts using a volume weight

average price. The record unequivocally resolves that Jarkas did not possess the requisite

FINRA approval to execute proprietary trades in that account. For that reason, Jarkas violated

NASD Rule IO 17.

Jarkas admits in his brief that he executed more than I 0 proprietary securities positions

and held those positions in the account for several days. Applicant Brief, at 22. Yet, he still

attempts to excuse his violation by stating that "only a handful of' trades were affected. Jarkas

30 See NASD Rule 101 l(k)(3).

- 23 -

cannot create a de minimis exception to the requirements of the net capital rule or the

corresponding requirements of NASO Rule 1017.

Although Jarkas reargues in his brief that if he had intended on conducting proprietary

trading he would have easily filed the appropriate Rule 1017 application (Applicant Brief, al 23),

his state of mind is irrelevant as there is no scienter requirement to the NA C's findings of

violation. Jarkas undoubtedly failed to file the application pursuant to NASO Rule 1017 at least

30 days before executing proprietary transactions. Accordingly, Jarkas' executed proprietary

trading triggered a filing requirement under NASO Rule 1017 that he failed to comply with.

3. Jarkas Failed to Appear for On-the-Record Testimony in Violation of FINRA Rules 8210 and 2010.

The NAC correctly affirmed the Hearing Panel's findings that Jarkas failed to appear for

on-the-record testimony in violation of FINRA Rules 8210 and 2010. In November 2009,

Jarkas remained the subject of an ongoing FINRA investigation. As such, the staff requested

that he provide on-the-record testimony on November 11 and November 30. Although he was

no longer registered with a FINRA member, Jarkas had a duty to comply with, and remain

subject to FINRA rules. 31 Specifically, FINRA Rule 8210 requires Jarkas to provide FINRA

with information orally, in writing, or electronically, and to testify, if necessary, under oath or

affirmation with respect to any matter involved in an investigation, complaint, examination, or

proceeding. See FINRA Rule 821 O(a). The rule also explicitly provides that the failure to

31 According to CRD, Jarkas filed a Uniform Termination Notice For Securities Industry Registration ("Form US") with FINRA and terminated'his registration on September 2, 2009. See RP 2663-2668; cf. NASD Notice to Members 99-77 (Sept. 1999), 1999 NASD LEXIS 49, at * 5 (reminding members and their associated persons that FINRA "may request information from, or file a formal disciplinary action against, persons who are no longer registered with a member for at least two years after their termination from the member" and citing to Article V, Sections 3 and 4 of the By-Laws).

- 24-

provide information or testimony, or to permit inspection and copying of books and records or

accounts is a violation of FIN RA Ruic 8210. See FIN RA Ruic 8210( c ). Jarkas failed to fulfill

his obligation to testify before FINRA in violation of Rules 8210 and 2010-not just once, but

on two separate occasions.

Jarkas admitted that he received FINRA 's first request by Jetter dated October 21, 2009

to appear for testimony on November 11. 2009. RP 2294. FINRA appropriately sent the request

letter to his personal and business addresses of record in the Central Registration Depository

("CRD"00) by U.S. first class and certified mail. RP 3571-3580. Instead of testifying on the

requested date, or contacting the staff to schedule a new date, Jarkas did not appear.

The staff then sent a second request by letter dated November 12, 2009 for Jarkas to

appear for testimony on November 30, 2009. RP 3581-3592. It was again appropriately sent to

Jarkas' personal and business addresses of record in CRD by U.S. first class and certified mail,

and was signed by parties authorized to receive mail at each respective address. RP 3581-3591.

Jarkas did not contact the staff to schedule a mutually agreeable new date and time. He did not

appear for his on-the-record testimony. This failure to give testimony violated FINRA Rule

8210.

In his brief, Jarkas first argues that he did not completely fail to respond to FINRA's

request for his testimony (Applicant Brief, at 23), and states that he "did respond through his

legal counsel." He argues that, Patterson, contacted FINRA examiner, David Lee, and explained

that Jarkas was unavailable due to his illness, upon which Patterson stated that Lee replied with a

noncommittal "okay." Applicant Brief, at 16, 23-24. Lee, on the other hand, testified and denied

he had such a conversation with Patterson. RP 1448-1449, 1511.

- 25 -

The NAC credited Lee's testimony and flatly rejected this argument. The NAC found it

troubling that Jarkas was proffering this defense for the first time in his NAC appeal. Indeed,

Jarkas switched his story. Before the NAC, Jarkas claimed that he understood from Patterson

that Lee's purported noncommittal Hokay" meant that his nonappearance for testimony was

acceptable. RP 5226-5227. Previously, however, Jarkas claimed in his Wells submission that

the reason that he did not appear for testimony was because he had already testified and was

advised by counsel that he was not required to testify again.32 See RP 480, 5116. Moreover,

Jarkas provides no evidence even today demonstrating his reliance on this purp011ed

conversation between Patterson and Lee. Given Jarkas' inconsistent stories and the lack of

evidence, the NAC was correct to reject this defense.

Moreover, FINRA's request letters provided Jarkas with clear instructions on what to do

if he was unable to appear on the requested date. Per the letter, he was to contact FINRA "to

agree on another mutually acceptable date and time." RP 3571, 3581. It is without question that

neither Jarkas nor Patterson did as FINRA instructed.33

Jarkas next argues in his brief that he did not imply that he would never testify.

Applicant Brief, at 15. But not complying with FINRA rules and not testifying as required are

exactly what Jarkas did. If Jarkas was uncertain about FINRA's request that he testify, he should

have contacted FINRA to clarify the arrangements for his testimony. Dep 't of Enforcement v.

Walblay, Complaint No. 2011025643201, 2014 FINRA Discip. LEXIS 3, at *16 (FINRA NAC

32 On March 5, 2009, Jarkas provided FINRA with on-the-record testimony related to the 2008 examination. RP 1714.

33 See RP 1719 (Patterson's testifying that there were no discussions with FINRA staff about setting a new date for Jarkas to appear for testimony).

- 26-

Feb. 25, 2014) (holding that respondent's reliance on counsel does not excuse a failure to appear

for testimony, and even if his attorneys were tasked to communicate with FINRA staff about

requests for testimony, respondent was ultimately responsible for ensuring compliance with his

regulatory obligations).

Jarkas never attempted to reschedule his on-the-record interviews. He did not even

discuss with FIN RA staff his obligation to appear, even after his counsel Patterson warned him

that HFINRA may take a difforent viewpoint'' and "may disagree" as to his nonappearance. RP

1717. Jarkas simply walked away. Walking away, however, does not excuse his misconduct.

See Dep ·1 <~{ E1?forceme11t v. Evansen, Complaint No. 2010023724601, 2014 FINRA Discip.

LEXIS 10, at *27 (FINRA NAC Jun. 3, 2014) (finding a FINRA Rule 8210 violation for the

failure to appear for testimony and stating that respondent should have raised, discussed, and

resolved any difficulties in testifying at the location and times set by FINRA in the spirit of

cooperation and promptness).

Jarkas suggests that his affected his ability to testify, but again,

he provides no evidence showing that his prevented him from testifying. See

Blair C. Mielke, Exchange Act Release No. 75981, 2015 SEC LEXIS 3927, at *73 (Sept. 24,

2015) (finding that, notwithstanding respondent's health problems, it was his obligation to

contact FINRA, explain the reasons why his response to FINRA's 8210 request would be

delayed, and propose alternate arrangements). According to his medical records, Jarkas was

, and working professionally during the time FINRA

requested his testimony, RP 2217-2218, 2250, 4796, 4802. Thus, the record amply supports the

NAC's conclusion that neither Jarkas' excused his rule violation.

The record also demonstrates that J arkas received actual notice and written warning of the

- 27 -

disciplinary consequences for his failure to appear, which included being barred from the

securities industry.34 FINR.A presented Jarkas with not just one, but two, opportunities to appear

for his on-the-record interview. On both occasions, he violated FINRA Rules 8210 and 20 I 0,

and, to date, has never provided FINRA with complete and full information related to its

investigation.

B. The NAC's Sanction of a Bar is Consistent with the Sanction Guidelines and Appropriate for Jarkas' Misconduct.

The NAC carefully considered the Guidelines, as well as the claims of mitigation Jarkas

raised concerning his failure to appear and testify before it imposed sanctions. The NAC

concluded that a bar served as an appropriately remedial sanction for Jarkas' violation of FINRA

Rule 8210. The NAC found it appropriate to also assess individual sanctions against Jarkas for

his other violative conduct. Specifically, the NAC found Jarkas' net capital violations egregious,

and consequently assessed against him a two-year suspension in all capacities and a $50,000

fine. RP 5564. For his failure to file a continuing membership application in violation of NASD

Rules I 017 and 2110, the NAC deemed that a 30-business day suspension in all capacities and

$5,000 fine against Jarkas were warranted. RP 5565. These unassessed sanctions are well

within the Guidelines. In light of Jarkas' bar sanction, however, the NAC did not impose the

additional sanctions. RP 5563. The Commission should sustain the NAC's sanction

determination in all respects.

34 The second request letter, dated November 12, 2009, provided the same rescheduling instructions as the first letter, and warned Jarkas that his failure to appear and testify at his scheduled on-the-record interview could subject him to a FINRA disciplinary action and the imposition of sanctions up to, and including, a bar from the securities industry. RP 3561-3592.

- 28 -

1. The NAC Correctly Barred Jarkas for His Failure to Appear for On­The-Record Testimony.

The regulatory framework with respect lo barring individuals who fail lo respond to

FINRA requests for information is well established. Because FINRA lacks subpoena power,

FINRA Rule 8210 "is the principal means by which FINRA obtains information from FINRA

member firms and associated persons in order to detect and address industry misconduct." North

Woodward Fin. C011J., Exchange Act Release No. 74913, 2015 SEC LEXIS 1867, at *32 (May

8, 2015), appeal docketed, Case No. 15-3729 (6th Cir. July 7, 2015). Accordingly, as the

Commission has recently held, "[i]t is therefore critically important to the self-regulatory system

that members and associated persons cooperate with [FINilA] investigations." Gregory Evan

Goldstein, Exchange Act Release No. 71970, 2014 SEC LEXIS 1350, at *44 (Apr. 17, 2014).

Subverting FINRA's ability to carry out its regulatory obligation to enforce compliance by its

members and associated persons should not be tolerated and barring individuals who violate

FINRA Rule 8210 is consistent with the Exchange Act's basic purpose of protecting public

investors. See id., at *44 (noting that the "[fjailure to respond to Rule 8210 requests impedes

[FINRA's] ability to detect misconduct that threatens investors and markets." (internal quotation

marks omitted)).

The NAC considered the Guidelines for FINRA Rule 8210 violations in determining

Jarkas' sanction. Guidelines, at 33. A bar is standard for individuals, like Jarkas, who provide

partial but incomplete responses, unless the individual can demonstrate that the information

provided to FINRA substantially complied with all aspects of the request, or in cases where

mitigating factors exist. Id.

- 29 -

The NAC utilized the "partial but incomplete response" analysis under the Guidelines,

crediting Jarkas' previous on-the-record testimony and partial written responses to the staffs

FINRA Rule 8210 requests. RP 5565, n. 40. Also noted in its decision, the NAC deliberated on

the Guidelines' three principal considerations under the pai1ial but incomplete response analysis

and concluded that: (1) the staffs requests for documents and information related to the Firm's

financial and other records were important to assess the Firm's true financial condition and the

extent of the Firm's net capital deficiencies; (2) the staff repeatedly made multiple requests

pursuant to FINRA Rule 8210, including two requests made for Jarkas' on-the-record testimony,

to which Jarkas never fully or substantially complied; and (3) there were no valid reasons

provided to the staff for his lack of compliance. RP 5566. The record undoubtedly demonstrates

that Jarkas failed to testify on-the-record twice and he never substantially complied with

FINRA 's requests for testimony and there were no factors to mitigate his conduct. 'T'he NAC

thus concluded that Jarkas should be barred for his failure to respond to FINRA's Rule 8210

requests. RP 5566.

Jarkas argues in his brief that a bar is excessive. According to Jarkas, the NAC should

not have imposed a bar based on a "complete failure to appear," which is "simply wrong"

because "the circumstances surrounding Mr. Jarkas' failure to appear for examination in

November 2009 do not remotely justify a bar." Applicant Brief, at 26. Jarkas' argument suffers

from three flaws.

First, the NAC did not impose the bar based on a complete failure to respond. The NAC

applied the partial but incomplete response analysis under the Guidelines, assessed the facts and

circumstances surrounding Jarkas' failure to appear, and determined that, even with crediting

Jarkas' compliance with a previous on-the-record testimony request, he did not substantially

- 30-

comply with FINRA Rule 8210. RP 5565-5567. As the NAC stated: "[W]e assess his sanction

under the partially, but incomplete, response analysis .... " RP 5565, n. 40. The record fully

supports the NAC's conclusion that Jarkas never provided the staff with important financial

records and other documentation regarding the Firm's outstanding tax liabilities and he did not

testify about them on the record. His partial, but incomplete, responses and refusal to testify

impeded the staffs investigation and rightfully should be treated the same as a complete failure

to cooperate in a FINRA investigation, subject to Jarkas' ability to prove mitigating

circumstances. See Dep 't of Enforcement v. Ga//agher, Complaint No. 2008011701203, 2012

FINRA Discip. LEXIS 61, at *48 (FlNRA NAC Dec. 12, 2012) (holding that a partial, but

incomplete, response to FINRA 's request for information, documents, or testimony presents the

functional equivalent of a failure to respond in any manner because individuals have selectively

kept certain information from FINRA).

Second, while Jarkas claims in his brief that perhaps there was a misunderstanding with

respect to his requirement to appear for testimony and that he "did respond [to FINRA's request

to appear] through his legal counsel" after receiving the first Rule 8210 request, it was Jarkas,

and not his counsel, who had the duty pursuant to FINRA Rule 8210 to cooperate fully and

comply with FINRA 's requests. Applicant Brief, at 23, 26; see Sundra Escott-Russell, 54 S.E.C.

867, 872-873 (2000) (stating "[r]eliance on counsel is immaterial to an associated person's

obligation to supply requested information to [FINRA]"). Contrary to Jarkas' belief that he did

in fact respond to FINRA' s initial request, relaying through his attorney that he is refusing to

comply with FINRA rules and testify under oath without a valid explanation and mutually

acceptable rescheduled date does not qualify as a bona fide "response" to a FINRA Rule 8210

request. In short, saying my client won't testify is essentially the same as no response to a

- 31 -

request for on-the-record testimony. See Gold\·tein, 2014 SEC LEXIS 1350, at * 16 (stating that

the SEC has "often noted" that recipients of Rule 8210 requests "must promptly respond to the

requests or explain why they cannot" and cannot otherwise set their own conditions on

compliance). The NAC correctly rejected Jarkas' new claim on appeal-that he responded

through his counsel, Patterson, and that FINRA staff replied that it was "okay" for him not to

appear-as not supported by the record. RP 5562. The evidence did show, however, that neither

.Jarkas nor Patterson scheduled another date for testimony per the instructions in Rule 8210

requests to appear, and Lee sent Jarkas a second letter the day after he failed to appear requesting

his testimony on a subsequent date and time. RP 5562. Jarkas failed to appear on that date as

well. In fact, Jarkas has never arranged for a new date or testified in response to the Rule 8210

requests.

Third, while Jarkas states that his failure to appear does not remotely justify the sanction

of a bar (Applicant Brief, at 26), case precedent in this area firmly establishes that it does. The

Commission has previously sustained FINRA 's sanction of a bar when the respondent-like

Jarkas-failed to appear for on-the-record testimony. See generally David Kristian Evansen,

Exchange Act Release No. 75531, 2015 SEC LEXIS 3080, at *56-57, 59 (July 27, 2015) (stating

that respondent's failure to respond to FINRA's requests for testimony "each individually

merit[ ed] a bar" and finding that a partial but incomplete response equally merits a bar when the

circumstances "demonstrate a willingness to defy the regulatory process and impede FINRA's

investigation" into potentially serious misconduct); North Woodward Fin. Corp., 2015 SEC

LEXIS 1867, at *39, 41 (baning respondent where he provided a partial responses to FINRA but

"has not demonstrated that the information" provided "substantially complied with all aspects of

FINRA's Rule 8210 requests"); Goldstein, 2014 SEC LEXIS 1350, at *43, 45 (barring

- 32 -

respondent and finding it remedial and not punitive in light of his Hpersistent refusal to comply

with FINRA's outstanding requests,,); Howard Brei/ Berger, Exchange Act Release No. 58950,

2008 SEC LEXIS 3141, at * 10, 52 (Nov. 14, 2008) (barring respondent for failing to appear at

two on-the-record testimonies in violation of NASO Rules 8210 and 2110 and finding that no

mitigating factors existed), q[f"d 347 Fed. App'x 692 (2d Cir. 2009). FINRA has been sounding

the warning for years, in its Rule 8210 letters, Notices to Members, and disciplinary proceedings,

that the failure to respond to its requests to testify can result in a bar.

2. Jarkas' Claims of Mitigation Are Unsubstantiated.

In barring Jarkas, the NAC found that there were no mitigating factors to warrant

imposing a lesser sanction.35 The claims of mitigation Jarkas raises before the Commission

merely repeat those he raised before the NAC. Applicant Brief, at 26-27. In his brief, Jarkas

presents a laundry list of factors that he asserts are mitigating, including his (I) medical

condition, (2) relocation to the East Coast, (3) termination of registration, ( 4) reliance on

counsel's advice, (5) prior disciplinary history, (6) prior good relations with FINRA staff, and (7)

reasonable assumption that FINRA had tabled his request to testify. Applicant Brief, at 26-27.

For the same reasons articulated in the NAC decision, the Commission should reject Jarkas'

claims of mitigation, which are unsubstantiated by evidence in the record.

Regarding his medical condition, Jarkas argues that health problems are significant

mitigating factor against sanctions. Applicant Brief, at 27. In determining sanctions, the NAC

addressed Jarkas' medical condition at length, and found that while personal health issues can

35 Jarkas' claims of mitigation were not ignored by the NAC. He simply provided no reasonable justification for his failure to testify on-the-record twice and "when a respondent is found to have committed violations he should not too easily avoid a sanction that is necessary for the protection of the investing public." Berger, 2008 SEC LEXIS 3141, at *40.

- 33 -

give rise to a level of mitigation when there is evidence that such issues "interfered" with the

respondent's ability to comply with FINRA rules, see Dep 't <~{Enforcement v. Saad, Complaint

No. 2006006705601R, 2015 FINRA Discip. LEXIS 49, at *25 (FINRA NAC Mar. 16, 2015),

Jarkas, presented no evidence-and the record is devoid of it-that his physical or psychological

state at the time in question either impaired or interfered with his ability to testify before FIN RA

on the two required dates.36 RP 5566-5567. Thus, Jarkas' medical condition was not a

mitigating factor weighing in favor of a reduced sanction.

Regarding his relocation to the East Coast and terminated registration, the NAC correctly

rejected Jarkas' implication that his sanction should be reduced because of his relocation to the

East Coast or the fact he was no longer registered with FINRA. RP 5567-5568. These factors

are not mitigating circumstances that reduce the seriousness of his failure to testify. Not only did

Jarkas testify before the Hearing Panel that he was living in California-and not the East

Coast-until the end of 2009, RP 2214-2216, and the Form U5 that lie filed to terminate his

FINRA registration provided a California residential address, RP 2663, but Jarkas should have

known that FINRA retains jurisdiction up to two years from the date a person terminates their

36 We note that the Paul L. Rice case, Admin. Proc. File No. 3-245 I, 1973 SEC LEXIS 3477 (Apr. 30, 1973), cited in Jarkas' brief is not instructive to the present case. The Commission did in fact bar the respondent from the securities industry for his misconduct. Id at *29. Yet, in permitting the respondent to reapply for registration after one year subject to effective supervision, the Commission noted several mitigating factors, including his age, lack of solid firm compliance procedures, and his demonstrated heath issues. Id at *29-31. Specifically, the Commission stated that "at the time of the hearing"

Id. at 30. Contrarily, at the time Jarkas was

required to appear for on-the-record testimony in November 2009, he was not under a doctor's care and reportedly deemed to be See supra note 18, and accompanying text.

- 34-

rcgistration.37

Tims, it was Jarkas', and not FIN RA 's, responsibility to comply with FIN RA

rules and update CRD with any new residence information while FINRA retained jurisdiction

over him. See Dep 't <~lE1?forcement v. Hodde, Complaint No. Cl 0010005, 2002 NASD Discip.

LEXIS 4, at *7-9 (NASD NAC Mar. 27. 2002) (finding respondent was in default when he failed

to update his residential address with CRD and made no effort to inform Enforcement staff of his

alleged new address knowing that he was the subject of an ongoing investigation).

Regarding his reliance on counsel, the Guidelines suggest that reasonable reliance on

competent legal advice can be mitigating for purposes of assessing sanctions, see Guidelines, at 6

(Principal Considerations in Determining Sanctions, No. 7), but such reliance must be

''reasonable" and based on "competent" legal advice. The NAC correctly found Jarkas' reliance

on his counsel's advice to be unreasonable, considering that his attorney, Patterson, had no

securities experience. RP 5568. See Mitchell v. Pidcock, 299 F.2d 281, 287 (5th Cir. 1962)

(stating "reliance on a lawyer's opinion is not a safe harbor if a reasonable man would know that

the opinion does not reflect a prudent lawyer's serious efforts to ascertain the applicable law on

the subject of the opinion."). Even with his limited understanding of FINRA rules, the evidence

shows that Patterson still advised Jarkas that "FINRA may take a different view" with respect to

his nonappearance. RP 1717. Instead of clarifying his compliance obligations with the FINRA

staff, Jarkas chose to blindly accept Patterson's advice and not appear for testimony. The NAC

also found it unreasonable for Jarkas to conclude, even with Patterson's advice, that he no longer

37 See FINRA Bylaws, Article V, Section 4(a) (stating that a person associated with a member that is no longer registered shall continue to be subject to FINRA rules and shall continue to provide information requested by FINRA pursuant to its rules for up to two years after the date the person ceases to be registered).

- 35 -

had an obligation to comply with FINRA rules.38 RP 5568; see Wa/blay, 2014 FINRA Discip.

LEXIS 3, at * 16 (holding that the person to whom a FINRA 8210 request is directed has the duty

to respond himself or to supervise others "diligently" with adequate follow-up to ensure a proper

response).

Jarkas suggests in his brief that his prior disciplinary history should be mitigating.

Applicant Brief, at 26. It is not. "[A] lack of disciplinary history is not mitigating for purposes

of sanctions." Dep 'I of E11forcemenl v. Craig, Complaint No. E8A200409590 I, 2007 FINRA

Discip. LEXIS 16, at *24 (FINRA NAC Dec. 27, 2007), aff'd, Exchange Act Release No. 59137,

2008 SEC LEXIS 2844 (Dec. 22, 2008). Notwithstanding this, as noted in the NAC decision,

Jarkas' prior disciplinary history is not stellar. Indeed, he was suspended in 2010 for six months

in all capacities from FINRA association and fined $25,000 for violations related to excessive

trading and unsuitable recommendations. See RP 2569-2662.

The NAC also correctly rejected Jarkas' claim of previous good relations with the staff as

a mitigating factor, finding no evidence of such in this case; and instead found Jarkas' lack of

cooperation with FINRA staff an aggravating factor. RP 5569. In his brief, Jarkas requests an

explanation as to why FINRA staff had shut down Global Crown's business operations in April

to May 2009 after he contributed new capital to cover the Firm's net capital deficiencies.

Applicant Brief, at 27. But Jarkas fails to provide the full picture of what occurred during that

time. The record undoubtedly establishes that, as of April 27, 2009, Global Crown was not in

compliance with the net capital rule. Accordingly, the staff appropriately notified Jarkas, and the

38 For the same reasons, we also reject Jarkas' seventh mitigating factor that he reasonably assumed FINRA had "tabled" its request for his testimony. The NAC correctly found his assumption unreasonable considering that an Enforcement investigation was ongoing and Jarkas never provided the staff with any date certain when he could testify. RP 5568.

- 36-

Firm's clearing firm, Legent Clearing, that Global Crown could not conduct a securities

business-other than liquidating transactions-until it demonstrated net capital compliance. RP

3603.

It was Jarkas-and not FINRA staff-who road blocked FINRA 's investigation of the

Firm's net capital deficiencies. The evidence shows that Jarkas precluded the staff from

obtaining necessary bank statements and other documentation verifying the source of his

$249,980 capital infusion, and purported payment to the IRS. See RP 5337-5338 (noting that the

staff repeatedly asked for cleared checks and wire transfer records to confirm payment in the

amount of $45,624.74 to the IRS, and other documents to compute accurately the firm's net

capital, that were never produced); RP 5559, n. 23 (summarizing the required documentation

necessary to support capital contributions or distributions). Without this information, the staff

could not authenticate Jarkas' capital contribution.39

The facts also show unequivocally that, although Jarkas believed that his capital infusion

of $249,980 cleared the Firm's net capital deficit, he was wholly mistaken. The staff found an

additional past judgment and different federal tax liens against Global Crown that also went

unreported, which increased the Firm's net capital deficit. See RP 652, 2943-2947, 5313, and

5553 (noting that even if Jarkas' capital infusion of $249,980 was cleared and accepted by

FINRA staff, the Firm still would not have been in net capital compliance). Contrary to Jarkas'

contention that FINRA "effectively put[] Global Crown out of business," Jarkas wrongfully

39 FINRA member firms are required to record the date and amount of all capital contributions or distributions, and have "readily available" bank statements and other documentation suppo1iing the transfer of assets to the firm's operating account, including a description of the source and purpose of the infusion. See NASD Notice to Members 07-16, 2007 NASD LEXIS 36, at *8 (describing the types of documentation the firm is required to maintain with respect to capital contributions or distributions).

- 37 -

attempted to control the scope of FINRA's investigation and thwai1ed the process once he

believed he gave all the information that was needed.40 The Commission has long held,

however, that a respondent cannot determine that FINRA 's information requests are not relevant.

North Woodward Fin. Corp., 2015 SEC LEXIS 1867, at *25-26 ("We repeatedly have held that

members and their associated persons may not 'second guess' FINRA's requests for

information."). Thus, none of Jarkas' arguments supp011s reducing his sanction.

V. CONCLUSION

The NAC's findings that Jarkas violated FINRA rules are fully supported by the record,

and his sanction of a bar for his failure to appear for on-the-record testimony is appropriate. The

Commission should sustain the NAC' s decision in all respects.

Respectfully submitted,

Lisa Jones Toms Assistant General Counsel FINRA - Office of General Counsel 1735 K Street, NW Washington, DC 20006 (202) 728-8044 Telephone

February 8, 2016

40 See e.g. RP 993 (FINRA Surveillance Director, Christian Zrull, testifying: "Jarkas was placing conditions on providing our staff with information, providing them with records. He said something to the effect that he would only provide us with the records that we needed to do our job if we were to lift that notification letter that we had sent to the firm-or withdraw that notification letter that we had sent to the firm advising them that they had less than the required net capital.").

- 38 -

"

APPENDIX OF APPLICABLE FINRA SANCTION GUIDELINES

This appendix sets forth the relevant text of FINRA 's Sanction Guidelines for both the NAC's unassessed net capital and NASO Rule I 017 sanctions and imposed sanction of a bar for Jarkas' FINRA Rule 8210 violation. The sources of the reproduced rule text are indicated.

(Source: See FINRA Sanction Guidelines (2013 ed.))

- I -

..

-lL

Table of Contents Overview

General Principles Applicable to All Sanction Determinations

Principal Considerations in Determining Sanctions

Applicability

Technical Matters

I. Activity Away From Associated Person's Member Firm

II. Arbitration

Ill. Distributions of Securities

IV. Financial and Operational Practices

V. Impeding Regulatory Investigations

VL Improper Use of Funds/Forgery

VII. Qualification and Membership

VIII. Quality of Markets

IX. Reporting/Provision of Information

X. Sales Practices

XI. Supervision

Schedule A to the FINRA Sanction Guidelines

Index

\,';) 2013. Fi NRA. All right::> reserved. July 2013 vers.ion of the Sanction Guid~lines.

1

2

6

8

9

12

17

19

25

31

35

38

46

67

76

99

106

107

6.

General Principles Applicable to All Sanction Determinations

1. Disciplinary sanctions are remedial in nature and should be designed to deter future misconduct and to improve overall business standards in the securities industry. The overall purposes of FINRA's disciplinary process and FINRA"s responsibility in imposing sanctions are to remediate misconduct by preventing the recurrence of misconduct. improving overall standards in the industry. and protecting the investing public. Toward this end. Adjudicators should design sanctions that are significant enough to prevent and discourage future misconduct by a respondent, to deter others from engaging in similar misconduct, and to modify and improve business practices. Depending on the seriousness of the violations. Adjudicators should impose sanctions that are significant enough to ensure effective deterrence. When necessary to achieve this goal, Adjudicators should impose sanctions that exceed the range recommended in the applicable guideline.

When applying these principles and crafting appropriate remedial sanctions, Adjudicators also should consider firm size: with a view toward ensuring that the sanctions imposed are not punitive but are sufficiently ren1edial to achieve deterrence.i (Also see General Principle No. 8 regarding ability to pay.)

1 f:·1dors 1'·, "(!nstdn tn cmmr:~cu,·,n with .. 1~sr-·:,·~.in·~ fii m ~.;i:e :u(~· th~ ~irrn·-; ~·m~m!·,~11 ,.~,:)ur:..~' ... , t ,.,.4

nature oi thi: firni':; b•mncs~: the nwnbc-r l~f mdividu;;I; :'1sso..:1:itc:i •:vitt; tlic- ~irP1, th~ le-.·-:! o• lr;J(fjng adivity :it the firm. ,,ther Cnl1!it:S lhal lhc (1rm ~l\ntrol~. i!i contn:•lk:d b\'. ()( 1:; lJll(J•:r c,11'li'K~ 1 i co11lrol w1lh, :m•1 th,:. forn'r. •:0r1l.r;ict1ml reL1t1Gn'.r1ip:• (sud1as1ntmd1;c1ri,; brckrrklt-:1r1n~~ f1w1 rd.Jti,,ns!Hps} This list is included for illustrative purposes and is not exhaustive. Other factors also rnay be considered in connection with assessing firm size.

2

2. Disciplinary sanctions should be more severe for recidivists. An important objective of the disciplinary process is to deter and prevent future misconduct by imposing progressively escalating sanctions on recidivists beyond those outlined in these guidelines. up to and including barring registered persons and expelling firms. Adjudicators should always consider a respondent's disciplinary history in determining sanctions. Adjudicators should consider imposing more severe sanctions when a respondent's disciplinary history includes (a) past misconduct similar to that at issue; or (b) past misconduct that evidences disregard for regulatory requirements. investor protection or commercial integrity. Even if a respondent has no history of relevant misconduct. however. the misconduct at issue rr1ay be so serious as to justify sanctions beyond the range contemplated in the guidelines; i.e .. an isolated act of egregious misconduct could justifl; sanctions significantly above or different from those recommended in the guidelines.

Certain regulatory incidents are not relevant to the determination of sanctions. Arbitration proceedings. whether pending. settled or litigated to conclusion. are not '"disciplinary" actions. Similarly. pending investigations or the existence of ongoing regulatory proceedings prior to a final decision are not relevant.

In certain cases, particularly those involving quality-of-markets issues, these guidelines recommend increasingly severe monetary sanctions for second and subsequent disciplinaf'J actions. This escalation is consistent with the concept that repea1eci acts of misconduct call for increasingly severe S.3nctions.

2 j\\;,.lJC:I• .. rJl1 ·r·_, [l'i1i)" (Cf:~L~;.·r 0

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im;:mmmt

3. Adjudicators should tailor sanctions to respond to the misconduct at issue. Sanctions in disciplinary proceedings are intended to be remedial and to prevent the recurrence of misconduct. Adjudicators therefore should impose sanctions tailored to address the misconduct involved in each particular case. Section 15A of the Securities Exchange Act of 1934 and FINRA Rule 8310 provide that FINRA may enforce compliance with its rules by: limitation or modification of a respondent's business activities, functions and operations; fine; censure: suspension (of an individual from functioning in any or all capacities. or of a firm from engaging in any or all activities or functions, for a defined period or contingent on the performance of a particular act); bar (permanent expulsion of an individual from associating with a firm in any or all capacities): expulsion (of a firm from FINRA membership and, consequently, from the securities industry): or any other fitting sanction.

To address the misconduct effectively in any given case, Adjudicators may design sanctions other than those specified in these guidelines. For example, to achieve deterrence and remediate misconduct, Adjudicators may impose sanctions that: (a) require a respondent firm to retain a qualified independent consultant to design and/or implement procedures for improved future compliance with regulatory requirements; (b) suspend or bar a respondent firm from engaging in a particular line of business; (c) require an individual or member firm respondent. prior to conducting future business, to disclose certain information to new and/or existing clients, including disclosure of disciplinary history; (d) require a respondent firm to implement heightened supervision of certain individuals or departments in the firm; (e) require an individual or member firm respondent to obtain a FINRA staff

3

letter stating that a proposed communication with the public is consistent with FINRA standards prior to disseminating that communication to the public; (f) limit the number of securities in wnich a respondent firm may make a market; (g) limit the activities of a respondent firm; or (h) require a respondent firm to institute tape recording procedures. This list is illustrative, not exhaustive, and is included to provide examples of the types of sanctions that Adjudicators may design to address specific misconduct and to achieve deterrence. Adjudicators may craft other sanctions specifically designed to prevent the recurrence of misconduct.

The recommended ranges in these guidelines are not absolute. The guidelines suggest, but do not mandate, the range and types of sanctions to be applied. Depending on the facts and circumstances of a case, Adjudicators may determine that no remedial purpose is served by imposing a sanction within the range recommended in the applicable guideline; i.e., that a sanction below the recommended range, or no sanction at all, is appropriate. Conversely, Adjudicators may determine that egregious misconduct requires the imposition of sanctions above or otherwise outside of a recommended range. For instance, in an egregious case. Adjudicators rnay consider barring an indi.vidual respondent and/ or expelling a respondent member firm. regardless of whether the individual guidelines applicable to the case recommend a bar and/or expulsion or other less severe sanctions. Adjudicators must always exercise judgment and discretion and consider appropriate aggravating and mitigating factors in determining remedial sanctions in each case. In addition, whether the sanctions are within or outside of the recommended range, Adjudicators must identify the basis for the sanctions imposed.

~

4. Aggregation or "batching" of violations may be appropriate for purposes of determining sanctions in disciplinary proceedings. The range of monetary sanctions in each case may be applied in the aggregate for similar types of violations rather than per individual violation. For example, it may be appropriate to aggregate similar violations if: (a) the violative conduct was unintentional or negligent (i.e .• did not involve manipulative, fraudulent or deceptive intent): (b) the conduct did not result in injury to public investors or. in cases involving injury to the public, if restitution was made: or {c) the violations resulted from a single systemic problem or cause that has been corrected.

Depending on the facts and circumstances of a case, however, multiple violations may be treated individually such that a sanction is imposed for each violation. In addition, numerous, similar violations may warrant higher sanctions. since the existence of multiple violations may be treated as an aggravating factor.

:~ Otht:r ;iv~mm<:, ~w:h •;s .ubit1alion. ~He ."l':.>il:ihll~ lo 111jurel! rn::l.:;rriers ·l) ;i rne.:.ns !<• rt:"rtre~s gricv~o.:cs.

4

5. Where appropriate to remediate misconduct, Adjudicators should order restitution and/or rescission. Restitution is a traditional remedy used to restore the status quo ante where a victim otherwise would unjustly suffer loss. Adjudicators may determine that restitution is an appropriate sanction where necessary to remediate misconduct. Adjudicators may order restitution when an identifiable person, member firm or other party has suffered a quantifiable loss proximately caused by a respondent's misconduct.;

Adjudicators should calculate orders of restitution based on the actual amount of the loss sustained by a person, member firm or other party, as demonstrated by the evidence. Orders of restitution may exceed the amount of the respondent's ill-gotten gain. Restitution orders must include a description of the Adjudicator's method of calculation.

When a member firm has compensated a customer or other party for losses caused by an individual respondent's misconduct. Adjudicators may order that the individual respondent pay restitution to the firm.

Where appropriate, Adjudicators may order that a respondent offer rescission to an injured party.

1Wl$5lft'l•l~-.g

6. To remediate misconduct, Adjudicators should consider a respondent's ill-gotten gain when determining an appropriate remedy. In cases in which the record demonstrates that the respondent obtained a financial benefit~ from his or her misconduct, where appropriate to remediate misconduct. Adjudicators may require the disgorgement of such ill-gotten gain by ordering disgorgement of some or all of the financial benefit derived. directly or indirectly.~ In appropriate cases. Adjudicators may order that the respondent's ill-gotten gain be disgorged and that the financial benefit, directly and indirectly, derived by the respondent be used to redress harms suffered by customers. In cases in which the respondent's ill-gotten gain is ordered to be disgorged to FINRA. and FINRA collects the full amount of the disgorgement order. FINRA's routine practice is to contribute the amount collected to the FINRA Investor Education Foundation.

7. Where appropriate, Adjudicators should require a respondent to requalify in any or all capacities. The remedial purpose of disciplinary sanctions may be served by requiring an individual respondent to requalify by examination as a condition of continued employment in the securities industry. Such a sanction may be imposed when Adjudicators find that a respondent's actions have demonstrated a lack of knowledge or familiarity with the rules and laws governing the securities industry.

t. "Ftn.1nc:i,1I hc:·1lciit ., irdud::t; .jny commi~ ..... ,,.-.n-;. ~ n•l<:cssaon~~. revenue~. pro•!t s. ,~:l1ns. t:t•t '.'1r1~~n~clt h)I\ in::omc. tees. cthc-r rr;nun~r ;;t1orl? or otfv:r tocndtts th! •~!pondr:-nt rct::=!i·.'~ci. :..~irc:ti_;-· 0r 1n ... --:a~~U_i a!- a result (•f th~ miS(Nld<Kl.

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5

8. When raised by a respondent, Adjudicators are required to consider ability to pay in connection with the imposition, reduction or waiver of a fine or restitution. Adjudicators are required to consider a respondent's }Jona fide inability to pay when imposing a fine or ordering restitution. The burden is on the respondent to raise the issue of inability to pay and to provide evidence thereof: If a respondent does not raise the issue of inability to pay during the initial consideration of a matter before "trial-level" Adjudicators. Adjudicators considering the matter on appeal generally will presume the issue of inability to pay to have been waived (unless the inability to pay is alleged to have resulted from a subsequent change in circumstances). Adjudicators should require respondents who raise the issue of inability to pay to document their financial status through the use of standard documents that FINRA staff can provided. Proof of inability to pay need not result in a reduction or waiver of a fine. restitution or disgorgement order, but could instead result in the imposition of an installment payment plan or another alternate payment option. In cases in which Adjudicators modify a monetary sanction based on a bona fide inability to pay. the written decision should so indicate. Although Adjudicators must consider a respondenfs bona fide inability to pay when the issue is raised by a respondent, monetary sanctions imposed on member firms need not be related to or limited by the firrn's required minimum net capital.

~~r:~enn·; ~11~~.~:mgnnen! G~ 1!i·gottt..""'n gain•~ lfTT~··rL~nt ·1k;.1t .1pPri)}·r1~1k le ~rr-·1-:<~1Jl·-= rw·.i ,.,r~:uct n.;~, t,~ (· ... ~!•~·C~i.:~! in a~: ..:~~~·5 ·:/ht~th;.;i ~r nc·t thr: (.'JH':!:pt i~ .;::~~~f·:.~I::: r-:·~r~_r.:.:-:1 :ii t~ir.:- :~~::,1 li~:·:;k

gu;.:;clint

·~ ~:-"'P ·,-: !::· ~~r:::-;· ~ :;f:.:~. ~:---:..L.:r:::·· At: ;.~1 ~...:~:. ?7":72 :A1.;gu.;! :_.!. :J~;~;·~. ·.·.-h·-·r: ,., th·_ ~;_·<L;i"!:1c~ .~r. ~

~~-~ ~;~:~.;~ 1~~,·;;:~;;;11~ ·::· 1;~::. ~:/,~;: t~:: .. F,1:r;~;~ 1t;;'..~:(•;r;; ~':~~'.; ~:~:.~:J'?~;f;~~\ili t?; ::' ·:·:k·r; ,;~ :~ ::'.; ~~! 1 ~.~~ ; ~ \1r:r ·

~i~~=-,~ ~:-::: ...... : ~~r, ~h:.' ;·:.-.,"':.)~~'_ts:~~ .:n .. ; ~,!h·_< C:-.. ;~rn1b· .. 1·.·'· ·~·-·:- ·~ ~: ~

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Principal Considerations in Determining Sanctions

The following list of factors should be considered in conjunc~ion with the imposition of sanctions with respect to all violations. Individual guidelines may list additional violation-specific factors.

Although many of the general and violation-specific considerations, when they apply in the case at hand, have the potential to be either aggravating or mitigating, some considerations have the potential to be only aggravating or only mitigating. For instance, the presence of certain factors may be aggravating, but their absence does not draw an inference of mitigation.1 The relevancy and characterization of a factor depends on the facts and circumstances of a case and the type of violation. This list is illustrative, not exhaustive; as appropriate. Adjudicators should consider case-specific factors in addition to those listed here and in the individual guidelines.

1. The respondent's relevant disciplinary history (see General Principle No. 2).

2. Whether an individual or member firm respondent accepted responsibility for and acknowledged the misconduct to his or her employer (in the case of an individual} or a regulator prior to detection and intervention by the firm (in the case of an individual) or a regulator.

3. Whether an individual or member firm respondent voluntarily employed subsequent corrective measures, prior to detection or intervention by the firm (in the case of an individual) or by a regulator, to revise general and/or specific procedures to avoid recurrence of misconduct.

l $(•11, "9 .. Pr.-.;m; v ~E.~. ·14•! F .?:l l2l)9. 121•!·15 (Wlh Cir . .i.006} it:>rlammg llv1t whil~ the e>.i'.·kn,.~ of:-. ..:i1scipl111ar;· hi;;tory 1s an aggr.:wciting fact ... ~r when dctcrmmmg the appr ... ~pn:itc sanction. it~ abst::rlcc i! m>l mllig:::ting;.

6

4. Whether the respondent voluntarily and reasonably attempted, prior to detection and intervention, to pay restitution or otherwise remedy the misconduct.

5. Whether, at the time of the violation, the respondent member firm had developed reasonable supervisory. operational and/or technical procedures or controls that were properly implemented.

6. Whether, at the time of the violation, the respondent member firm had developed adequate training and educational initiatives.

7. Whether the respondent demonstrated reasonable reliance on competent legal or accoLinting advice.

8. Whether the respondent engaged in numerous acts and/or a pattern of misconduct.

9. Whether the respondent engaged in the misconduct over an extended period of time.

10. Whether the respondent attempted to conceal his or her misconduct or to lull into inactivity, mislead, deceive or intimidate a customer, regulatory authorities or. in the case of an individual respondent, the member firm with which he or she isiwas associated.

11. With respect to other parties, including the investing public, the member firm with which an individual respondent is associated. and/or other market participants. (a) whether the respondent's misconduct resulted directly or indirectly in injury to such other parties. and (b) the nature and extent of the injury.

nwcgw.;a:n

12. Whether the respondent provided su bstantia I assistance to FINRA in its examination and/or investigation of the underlying misconduct. or whether the respondent attempted to delay FINRA's investigation, to conceal information from FINRA. or to provide inaccurate or misleading testimony or documentary information to FINRA.

13. Whether the respondent's misconduct was the result of an intentional act, recklessness or negligence.

14. Whether the member firm with which an individual respondent is/ was associated disciplined the respondent for the same misconduct at issue prior to regulatory detection. Adjudicators may also consider whether another regulator sanctioned a respondent for the same misconduct at issue and whether that sanction provided substantial remediation.

15. Whether the respondent engaged in the misconduct at issue notwithstanding prior warnings from FINRA, another regulator or a supervisor (in the case of an individual respondent) that the conduct violated FINRA rules or applicable securities laws or regulations.

7

16. Whether the respondent member firm can demonstrate that the rnisconduct at issue was aberrant or not otherwise reflective of the firm's historical compliance record.

17. Whether the respondent's misconduct resulted in the potential for the respondent's monetary or other gain.

18. The number. size and character of the transactions at issue.

19. The level of sophistication of the injured or affected customer.

~

Net Capital Violations FINRA Rule 2010 and SEC Rule 15c3-1

I Principal Com.iderations in Determining Sanctions

\ See Principal Cons;derations in Introductory Section

11. I i 2.

I I

I I

I i

I

I I

I

Whether the firm continued in business while knowing of deficiencies/inaccuracies or voluntarily ceased conducting business because of the deficiencies/inaccuracies.

Whether respondent attempted to conceal deficiencies or inaccuracies by any means. including "parking" of inventory and inflating ·'mark-to·market'' calculations.

Monetary Sanction

Fine of Sl,000 to SS0,000.

, ____ .... ______ .. ___________________ . _______ .__ _____ , __ _...__ __ --------

IV. Financial and Operational Practices 28

Suspension. Bar or Other Sanctions

Firm

Consider suspending the firm with respect to any or all activities or functions for up to 30 business days.

In egregious cases. consider a lengthier suspension (of up to two years} or expulsion of the firm.

Individual

Consider suspending the Financial Principal or responsible party in any or all capacities for up to 30 business days.

In egregious cases. consider a lengthier suspension (of up to two years) or a bar.

; I

I -~

------------ ·---

W311¢1a)=>:q

Failure to Respond, Failure to Respond Truthfully or in a Timely Manner, or Providing a Partial but Incon1plete Response to Requests Made Pursuant to FINRA Rule 821 O FINRA Rules 2010 and 8210

I I Principal Considerations in Determining Sanctions

I See Principal Considerations in Introductory Section

I Failure to Respond or to Respond Truthfully

II 1. Importance of the information requested as viewed from

FINRA's perspective.

I Providing a Partial but Incomplete Response

I I 1. Importance of the information requested that was not I provided as viewed from FINRA's perspective, and vvhether i the information provided was relevant and responsive to

I the request.

I 2. I

I 3.

Number of requests made, the time the respondent took to respond, and the degree of regulatory pressure required

to obtain a response.

Whether the resoondent thoroughly explains valid reason(s)

for the defic :iencies in the response.

Failure to Respond in a Timely Manner

1.

I

Importance of the information requested as viewed from

FINRA's perspective.

I 2. Number of requests made and the degree of regulatory

I pressure required to obtain a response. t Length of time to respond.

Monetary Sanction

Failure to Respond or to Respond

Truthfully

Fine of $25,000 to SS0,000.

Providing a Partial but

Incomplete Response

Fine of S 10,000 to S 50.000.

Failure to Respond in a Timely

Manner

Fine of 52,500 to S25.000.

l Wh.:n a ri:sp1.~1idcnt docs not rcsp,.,n.j until ;;ftcr rtNRA tiles a (Ompl::iint. Auiu~fo:att1r,; 3houi~ apply th~ prt:swnptle>n Unt th:: f;;1!ur:: c~'ll!·Ulut::~ cl ::-:m1plctr.: iailurr: t::· r~~pt:•nJ

The lad. (tf lur:-ri t~' CtJstorncrs ,,r bc-ncf1t tc• ;i .;i,,lator ck,i::s not rn!t1gatc::. 1-'1;le &210 vi,.,1..;t1on.

V. Impeding Regulatory Investigations 33

Suspension, Bar or Other Sanctions

Individual

If the individual did not respond in any manner.

a bar should be standard.:

Where the individual provided a partial but incomplete response, a bar is standard unless the

person can demonstrate that the information

provided substantially complied with all aspects of the request.

Where mitigation exists, or the person did not respond in a timely manner. consider suspending the individual in any or all capacities for up to two years.;

Firm

In an egregious case, expel the firm. If mitigation

exists. consider suspending the firm with respect

to any or all activities or functions for up to

two years.

In cases involving failure to respond in a timely

manner. consider suspending the responsible individual(s) in any or all capacities and/or

Sllspending the firm with respect to any or all

activities or functions for a period of up to 30

business days.

mmm

Member Agreement Violations FINRA Rule 2010

Principal Considerations in Determining Sanctions

See Principal Considerations in Introductory Section

1. Whether the respondent breached a materia I provision of the agreement.

2. Whether the respondent breached a provision of the agreement that contained a restriction that was particular to the firm.

3. Whether the firm had applied for, was in the process of applying for, or had been denied a waiver of a restriction at the time of the misconduct.

l As set forth in General Principle No. 6. Ac:jud1otor~ may ~Is.:> crt:cr d1sg~'rgcmcnt.

VII. Qualification and Membership

Monetary Sanction

Fine of 52,500 to sso.ooo.:

44

Suspension. Bar or Other Sanctions

In cases involving a serious breach of a restrictive agreement. suspend the firm with respect to any or all activities or functions and/or suspend the responsible individual in any or all capacities for up to two years.

In egregious cases, consider expelling the firm and/or barring the responsible individual.

l

1

I I

····----···--- _j

m::ammrn

Cl~RTIFICATI~ OF COMPLIANCE

I, Lisa Jones Toms, ccr!ily !hat the fo regoing FI NR/\'s Brie f in Opposition to the Application fo r Review (f7ile No. 3- 16948) complies with the length limitation sci fo rth in SEC Rule or Practi ce I 54(c). I have relied on the word count feature o r Microso ft Word in verifying that thi s brier contains 12,95 1 words.

r ebruary 8, 20 16

Lisa .J ones Toms Assistant General Counsel r! NRA 0 nice or General Counsel 1735 K Street, NW Washington, DC 20006 (202) 728-8044 Telephone

CERTIFI CATE OF SERVI CE

I, Lisa Jones Toms, ce rti fy that on th is 8111 clay of February 20 16, I caused a copy of the fo regoing l' INR/\ 's Brier in Opposition to the Appl ication for Review (File No. 3-16948) to be sent via messenger to:

Brent J. Fields, Secretary Securities and b:changc Commission

I 00 F Street, NE Room I 09 15 - Mailstop I 090 Washi ngton, DC 20549-1090

and via overn ight delivery and electronic mai l to:

Robert J. Stumpf, .Jr. , Esq. Sheppard Mullin Richter & Hampton LLP

4 Embarcadero Center, I 7' 11 Floor San Francisco, CJ\ 9411 1

rs tum p r@sheppard mu 11 in .com

Service was made on the Securities and Exchange Commission by messenger and on the Applicant by overnight delivery service and electronic mail due to the distance between the offices or FINRJ\ and the Appl icant.

Lisa Jones Toms Assistant General Counsel PfNRA - Office of General Counsel 1735 K Street, NW Washington, DC 20006 (202) 728-8044 Telephone