An irreverent Wall Street Blog
Stockbroker and Wife Fake Statements For Home Loan
June 16, 2017If my aunt were a man, she'd be my uncle.That saying perfectly addresses the predicaments of many of my clients. If only the firm didn't have that policy, I would have been able to do what I did. If only the client hadn't died the day before, she would have authorized the trade. If only you were cheaper, I could afford to hire you as my lawyer.
In a recent FINRA regulatory settlement, a husband and wife seeking a bank loan apparently mused that if only they had more money in their securities accounts, the bank might be more disposed to extend a loan. You think? After the couple put their flawed plan into action, FINRA responded with a fine and suspension.Case In PointFor the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Scott E. Hedeman submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Scott E. Hedeman, Respondent (AWC 2016052023601, June 2, 2017).The AWC asserts that Hedeman entered the industry in 2002 and between July 2007 and November 2016 was registered with FINRA member firm Allstate Financial Services, LLC.The AWC asserts that "Hedeman has not been the subject of a prior formal disciplinary action relevant to this matter."SIDE BAR: Read about the variations in FINRA AWCs pertaining to the presentation of a respondent's background: "FINRA's Foolish Inconsistency" (BrokeAndBroker.com Blog, June 9, 2017)Home LoanThe AWC alleges that in June 2016, Hedeman and his wife sought a $225,000 home refinance/remodel loan from a bank. The loan application purportedly asked for account statements for any securities accounts owned by the couple. At the time of the application, Hedeman and his wife each allegedly had an Allstate securities account with respective March 31, 2016, balances of $.13 and $144.90. The AWC alleges that:
In order to increase the likelihood that the bank would grant Hedeman and his wife the loan, Hedeman submitted two falsified account statements with his loan application. In order to falsify the account statements, Hedeman first accessed Allstate's internal system to print two customer account statements for which he was the representative of record; Hedeman then cut and pasted his and his wife's name onto the two account statements. Lastly, Hedeman submitted the altered account statements to the bank. Due to the alterations, the securities account statements that Hedeman sent to the bank now falsely reflected that, as of March 31, 2016, Hedeman and his wife had account balances of $28,043 and $58,502.DischargeAccording to FINRA's online BrokerCheck records as of June 15, 2017, on November 11, 2016, Allstate "discharged" Hedeman based upon allegations that:
Loss of confidence after allegations of improperly altering personal brokerage account statements.
Sanctions
BrokerCheck Allegation
I'm not sure that Allstate's BrokerCheck explanation of the reason for terminating Hedeman says what it means:
Loss of confidence after allegations of improperly altering personal brokerage account statements.
As to the firm's "loss of confidence," that's a gimme. I think it fair to say that an employer would lose confidence in the integrity of an employee given the allegations of fabricating account statements provided to a bank in support of a loan application. A more interesting issue is whether Hedeman altered "personal brokerage account statements." Let's put aside for now whether any alleged alteration was improper. What the AWC asserts took place was that Hedeman printed out two account statements of Allstate customers. Allegedly, he then cut-and-pasted his name and address and that of his wife onto those customer statements.
Okay, so, let's think about what Hedeman did. He removed the financial portions of a customer's account statement. Hedeman then replaced the customer's identifying information with his and his wife's. If you think about it, and I am, Hedeman may not have actually "altered" his or his wife's Allstate securities account statements; if anything, he could just as easily be accused of having altered the customer statements by adding his and his wife's name. Taken a step farther, in removing the customer's name and address from the top of the customer's securities account, Hedeman may not have "altered" any statement but, more precisely, may have "created" or "fabricated" a new statement, albeit a fraudulent one.
Mustache on the Mona Lisa
From my perspective the issue of doing a mash-up of an account statement combining the bottom half of one customer's statements with the name/address portion of another isn't, in and of itself, illegal or tortious or even a regulatory violation. It's sort of like going online to the Louvre's website, downloading an image file of the Mona Lisa, and drawing a mustache on the image. What moves the needle from harmless to harmful conduct is when you paint a mustache on the real Mona Lisa. If we are being precise, it's not that Hedeman altered or created a statement that is the problem; rather, it is that he presented a fabricated document to a third party in order to fraudulently obtain some benefit.
A Bank Shot
Based upon the AWC's presentation of the underlying facts, there seems to be a compelling case for the unnamed bank to file a civil fraud lawsuit against the Hedemans. One problem with such a lawsuit is that the the AWC does not allege that the Hedemans secured a loan -- the allegation is that they submitted the doctored statements in an effort to secure a loan. It may well be that the bank denied the loan application. In which case there would not seem to be any financial loss. Similarly, the Hedemans' overall finances (exclusive of their two bogus securities accounts) may have warranted the extension of the loan and absent a default in repayment, there may again not be any financial loss. The more troubling alternative is that the loans were extended in reliance of the fabricated statements and that the bank sustains a loss should the Hedemans' default.Even if the Hedemans' loan application was denied by the bank or the bank never sustains a penny of loss, the couple's conduct could still have crossed over the line and amounted to civil fraud. Taking things a step further, depending upon whether any loans were fraudulently obtained or whether any documentation/information was provided subject to notarized affidavits, the couple's conduct may well have strayed into criminality.Out of Allstate's Good Hands
What you may not have focused on amid the flurry of stupidity by the Hedemans is that they did not defraud any Allstate Financial customers: no funds or securities of any customers were compromised. Also, the cited misconduct did not involve a sales practice violation and the FINRA member firm was not victimized. The victim here, if any, was the unnamed bank and the damages may be calculated as to the amount of any loan extended in reliance of the fabricated documents and any subsequent non-repayment of the loan.A Thought Piece
In closing, let me put one more fact pattern before you:
On April Fool's day a stockbroker telephones a local pizzeria and orders a dozen pies with extra cheese to be delivered to his boss at work. The boss is lactose intolerant and won't touch anything with gluten. When placing the order, the stockbroker pretends to be the boss and says that he will pay cash upon delivery.
- Has the stockbroker engaged in fraud by placing the prank call with the pizzeria and also by impersonating the boss?
- Has the stockbroker committed a crime by impersonating his boss and persuading the pizzeria to prepare and deliver the pies?
- Has the stockbroker engaged in a regulatory violation by his conduct?
- Should FINRA exercise jurisdiction over this event and the registered rep?
- If the pizzeria is on April Fools alert and calls back the boss to confirm the order and the boss says he didn't place it and the pizzeria never makes the dozen pies, would that alter your above answers -- and keep in mind that the unnamed bank may never have lent any money to the Hedemans.
I'm not shedding any tears for Hedeman and I am not wagging a finger of disapproval at FINRA. As such, today's BrokeAndBroker.com Blog is as academic as any discussion of Wall Street regulation gets. If I get you thinkin', then that's great. If you aren't intrigued by the what ifs, at least enjoy the juxtaposition of a Shania Twain music video with one by Nat King Cole.