At the beginning of most FINRA OTRs, the examiner reads from a script of sorts, outlining some of the basic rules governing the proceeding. One of the things the script calls for is an express acknowledgement by the witness that he or she is testifying pursuant to Rule 8210, and that, as a result, a failure to respond truthfully could result in a disciplinary action being brought for violating 8210, with sanctions that could include a permanent bar.  The script then immediately follows with a request for a second acknowledgment that because the witness is under oath, a failure to testify truthfully could result in the matter being referred to criminal authorities for perjury.

While this second statement is as true as the first, I have often wondered whether it is purely an empty threat, or whether it has real teeth to it. When I counsel clients about testifying at OTRs, I am always careful to tell them about the possibility of a criminal referral when I outline the worst case scenario (something clients invariably want to hear about, for some reason).  But, does it every really happen?  Or are the regulators content merely to bar someone permanently?

In a recent SEC decision, the SEC provided its answer to these questions.  In January this year, the Commission barred John Rafal, an investment advisor, for, among other things, paying an undisclosed and illegal fee to a lawyer for referring to him an elderly but very wealthy client.  The decision also reflects that in addition to that misdeed, Mr. Rafal  misled the Commission Staff during the investigation by testifying falsely that the referral fee he paid to the lawyer had been returned.  As noted, Mr. Rafal was barred by the SEC, and ordered to pay $275,000 in civil penalties plus another $275,000 in disgorgement.  Ouch.

But, that wasn’t enough for the SEC.  Beyond merely exacting its own pound of flesh, it referred Mr. Rafal to the Department of Justice, stemming from the less-than-truthful manner in which Mr. Rafal had answered questions posed to him during the investigation.  Two days ago, adding considerable insult to an already serious injury, Mr. Rafal was sentenced in federal district court for obstructing the SEC’s investigation.  Mr. Rafal received a year’s probation, with four months to be served in in-home detention, and a $4,000 fine.

That may not sound like much of a punishment, at least relative to the magnitude of the SEC penalties, but, the point is that here, the SEC was not reticent about making the criminal referral that is routinely threatened by regulators in most investigations. I am not exactly sure what made the facts of this case so special, as I can assure you that I have seen witnesses lie – under oath – about things much more serious, and more central to an investigation, than Mr. Rafal’s lie here without getting referred to the DOJ.  Regardless, there is an important lesson: sometimes, the regulators mean what they say when they suggest there are consequences beyond the typical range of regulatory fines, suspensions and bars, that it really can be a crime to lie to the examining staff.  As with many things in life, Mr. Rafal learned the hard way that it is often the case that the botched cover up gets you into more trouble than whatever it was you were trying to cover up in the first place.