Thursday, July 19, 2012

What the Heck Is a Willful Violation?

Let's see how the Uniform Securities Act explains the meaning of the term "willful violation." The notes to the USA state: As the federal courts and the SEC have construed the term “willfully” in § 15(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78o(b): all that is required is proof that the person acted intentionally in the sense that he was aware of what he was doing. Proof of evil motive or intent to violate the law, or knowledge that the law was being violated, is not required. So, don't think for a moment that a willful violation occurs because the person clearly knew he was violating the law or maybe even the specific statute.  No, no, no. The so-called "investment adviser" was not declared mentally incompetent at the time she created a little-pretend family of mutual funds. So . . . she obviously knew the "mutual fund investments" she was "selling" to people were bogus. Willful violation. Of course, the New Jersey Bureau of Securities took away her license as an RIA. . . more importantly, the attorney general's office got a plea bargain out of her in a criminal proceeding leading to PRISON time. For more on this case, see
But, that's just ONE example of a "willful violation." A "willful violation" could involve a financial planner getting her license revoked by the state but continuing to offer and provide financial planning services, anyway. That could--believe it or not--lead to criminal penalties. But that would be highly unusual.
The Uniform Securities Act  makes it clear that one can defraud an investor without any intent to defraud. Through negligence, incompetence, or breach of fiduciary duty, you can be sued and/or lose your license, but it's not a crime to buy somebody an inappropriate security. It's just often a career-ender. Check out what the Uniform Securities Act has to say at the very beginning: Part I Fraudulent and Other Prohibited Practices
Sec. 101. [SALES AND PURCHASES.] It is unlawful for any person, in connection with the offer, sale or purchase of any security, directly or indirectly
(1) to employ any device, scheme, or artifice to defraud,
(2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or
(3) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.
OKAY, notice the last two lines under (3)??That means that a sloppy/incompetent/negligent person can violate the securities laws of the state by "engaging in a course of business which does or would operate as a fraud." How? Because the dude is so incompetent that all investors likely get bad information or no information. He's not going to jail; he's just going into a new industry at his earliest convenience. For example, a few years ago a new registered representative in Illinois had an elderly client who wanted "government bonds for safety and income." Dude bought her government bonds . . . issued by Honduras and Nicaragua. Was the investor defrauded? Yes. Did the dude go to jail? No. And since he didn't mean to hurt anyone, he's still a registered representative, right? Wrong. He acted in a way that operated as a fraud on the investor. He's not a criminal; he's just incompetent. And now, he's in a new line of work, hopefully one more suited to his particular skill set.

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