Daughter's College Tuition And Her Stockbroker Father's Fraud

October 31, 2011

For some, the Great Recession is over - a thing of the past. No, things are not back to normal, or whatever was normal, or whatever will be the new normal, but there's a sense among many battered souls that we've turned some corner.

Frankly, I'm not sure that I buy into all that optimism. Seems like there's more than a smidgen of wishful thinking there, but I hear the chatter and I recognize that there's growing talk about bouncing off recent market bottoms. Of course, that's also what a dead cat does.

Regardless of whether it's still bad or getting better, Wall Street and Main Street are littered with the wrecks of busted-up and broken-down lives. A lot of folks may have physically gotten through the worst of times, but they're shadows of their former selves - emotional and financial zombies. Fact is, we got a lot of walking wounded among us.

Stockbroker Hunt

Take the case of Harry W. Hunt, who entered the securities industry in 1983, and during the relevant years of 2002 through 2009, worked as a General Securities Representative at Wells Fargo Advisors, LLC f/k/a Wachovia Securities, LLC ("Wells Fargo"), until he was terminated on April 20, 2009.

As with so many folks who lost their jobs during the Great Recession, Hunt seems to have been battered by the economy - however, in his case, he took more than a few body blows; frankly, it's more like his house collapsed upon him and he was buried deep within the rubble.

Financial Industry Regulatory Authority ("FINRA") documents assert that in 2009, Hunt experienced significant financial difficulties, which impacted his ability to timely pay his business and personal expenses. In an effort to hide the extent of these problems from his wife, Hunt rented a mail box at The UPS Store, and directed bills and other communications to that address.

Some folks dressed for work, everyday, and then went to a local Starbucks or the library, unable or unwilling to tell their families they had lost their job. Some folks cut back: no restaurants, no movies, no new laptop. Some folks rented mail boxes. Don't be too quick to judge if you didn't find yourself in such straits.

Sallie Mae Not

During this same period when Hunt's life seemed to be falling on top of him, his oldest daughter had applied to college. That was not good timing. Hunt was unable to pay her anticipated Fall 2009 tuition. A heartbreaking, gut-wrenching issue for many Americans. House underwater. Laid off. Credit cards maxed. No job prospects. And as bad as all of that is, those setbacks pale in comparison to the prospect of disappointing your child.

Trying to find some way to cope, Hunt attempted to obtain a short-term $10,000 student loan by completing several online student loan applications through the Sallie Mae Education Trust ("Sallie Mae"), an originator of federally insured student loans. Unfortunately, the Sallie Mae student loan applications required a guarantor Co-Signer other than the student.

Three Failed Applications

In January 2009, Hunt submitted himself as the guarantor but was rejected because of his financial status. As proof of his daughter's verifiable address, Hunt submitted to Sallie Mae an altered photocopy of her driver's license, which indicated her home address as that of his The UPS Store box.

Subsequently, he submitted two additional applications proposing as guarantors his wife and then his father; however, Sallie Mae also rejected both those individuals.

A Friend In Need

After the three loan applications were rejected and apparently believing he had no other viable options, Hunt submitted a fourth application through Sallie Mae proposing as the guarantor a friend, who was also a customer since the mid-1990s. The application included this Co-Signer's name, address, and social security number (largely obtained from Wells Fargo's files); however, Hunt had never asked his friend's permission and the application was submitted without authorization. Although the Sallie Mae application sought the applicant's "permanent address" and pointedly admonished that "No P.O. Boxes Allowed," Hunt provided The UPS Store street address and his assigned mail box; he also provided his cell phone number and personal email address as the means of contact.

According to Hunt, the intent of this subterfuge was to buy time until his retention bonus and deferred compensation were paid to him by Wells Fargo. Nonetheless, the Sallie Mae application clearly warned the Borrower and Co-Signer that their signatures attested to their acceptance that they had provided truthful responses, had agreed to be bound by the terms of the Promissory Note, and warned of the ramifications of default. Despite those warnings, on March 24, 2009, Hunt signed his friend/customer's name as the Co-Signer and electronically submitted the loan application to Sallie Mae, thereby creating a potential liability for the unaware guarantor.

Florida Vacation

In early April 2009, immediately after Hunt and his family returned from a Florida vacation, Sallie Mae contacted the Co-Signer regarding his guarantee of the student loan. The Co-Signer disavowed his role as guarantor and notified Wells Fargo of Hunt's actions. Thereafter, Sallie Mae denied the loan application, and Wells Fargo terminated Hunt.

SIDE BAR: Okay, admit it - you read about the Florida vacation. A vacation? How the hell could Hunt be going on vacation at a time like this, you ask. No wonder he's in financial distress, you say.

According to FINRA records, Hunt was on the hook for $1,200 in flights and between $2,500 and $3,000 in vacation home rental costs. Allegedly, he had made the vacation plans months earlier and paid for the trip in October 2008.

Perhaps Hunt couldn't get a refund. Perhaps, like so many fathers, he simply figured he owed this to his family. Sorry, there are no simple answers to these complex problems. We all struggle with this stuff, everyday.

Unfortunately, the consequences of losing his job at Wells Fargo cascaded as the termination also cost Hunt his deferred compensation and retention bonus which vested at a later date. He went from broke to broker.

Expenses

You'd like to think that as bad as things got for Hunt that they ended with the Sallie Mae fiasco. Unfortunately, there's more.

Seems that as Wells Fargo started looking into Hunt's business affairs, they uncovered a rash of expense report inconsistencies. The policy at Wells Fargo was, in pertinent part, for employees to incur business expenses and pay them before submitting a reimbursement claim.

Wells Fargo alleged that between February 2008 and March 2009, Hunt had photocopied and altered a number of his personal checks to create the false impression that he had paid for expenses prior to seeking reimbursement from Wells Fargo. We're talking about charges for $266.62 in telephone calls; $477.85 in printing expenses, and four restaurant meals totaling about $1,100. In fact, Hunt did use the reimbursements to ultimately pay the cited charges, albeit through his American Express account.

FINRA Complaint

FINRA filed a Complaint against Hunt alleging that

he had used the name, address, and social security number of one of his customers to co-sign a student loan application with Sallie Mae Education Trust ("Sallie Mae") for his daughter without the customer's knowledge or authorization, in violation of FINRA Conduct Rule 2010;
in furtherance of the student loan application, Hunt altered a copy of his daughter's driver's license and submitted it to Sallie Mae, in violation of FINRA Rule 2010; and
on six occasions Hunt falsified expense reports by submitting false documentation to his member firm in violation of NASD Conduct Rule 2110 and FINRA Conduct Rule 2010.

Although it appears that FINRA and Hunt largely stipulated to most of the material facts in the Complaint, Hunt argued that his actions did not constitute violations of FINRA Conduct Rule 2010 (formerly NASD Conduct Rule 2110).

SIDE BAR: NASD Conduct Rule 2110 (now FINRA Conduct Rule 2010) requires a registered person, "in the conduct of his business," to "observe high standards of commercial honor and just and equitable principles of trade." FINRA uses a two-part test to determine whether conduct violated Rule 2110:

1. the misconduct must occur in the conduct of the respondent's business; and

2. the misconduct must violate just and equitable principles of trade.

Two Out of Three

FINRA found that Hunt's use of his customer's name and identifying information (which were largely obtained from Wells Fargo's files) satisfied the requirement that the cited misconduct must occur in the conduct of his business. Moreover, Hunt's misconduct was found to be contrary to the ethical standard of the industry, which purportedly requires the promotion of professionalism in the securities industry. Similarly, FINRA found that Hunt's falsification of expense reports occurred in the conduct of his business.

FINRA did not find that Hunt's submission of his daughter's falsified driver's license occurred within the conduct of his business because that event did not occur in connection with the submission of the Sallie Mae application identifying the friend/customer as the Co-Signer. As a result, this cause of action was dismissed.

Mitigation

The Hearing Panel noted that while Hunt appeared to be remorseful, he did not accept responsibility for his actions prior to detection by Wells Fargo. Moreover, Hunt's conduct seemed intentional, he was aware of the ramifications of his actions, he engaged in a protracted series of violations, and the cited misconduct resulted in a financial benefit to him.

In considering mitigation, the Panel made short shrift of Hunt's claims that Wells Fargo suffered no financial injury and that, to the contrary, he was significantly harmed by the loss of his job and attendant deferred compensation and benefits. As to Hunt's third argument for mitigation, the Decision explained it:

Third, Hunt stated that his misconduct resulted from his efforts to be an honorable family man and protect the needs of his family. When describing his life as a high producing representative, Hunt stated that he and his wife were "able to do things we never did before.. . . " " [l]t became a lifestyle that we were comfortable with. When things got tougher, unfortunately I chose to mask things a bit." There is nothing honorable about lying and falsifying important documents to continue living above one's means. Simply put, Hunt chose to put his own self-interest over the integrity and professionalism of the securities industry.

Finally, Hunt urged the Panel to consider that his misconduct was not indicative of his character but aberrant. The Panel was not persuaded and found that Hunt minimized his misconduct and did not seem to fully appreciate the seriousness of his conduct.

Barred

Accordingly, the Hearing Panel found that Hunt's conduct was egregious and that the aggravating facts and lack of mitigating facts required that Hunt be barred from associating with any member in any capacity. In addition, he was ordered to pay costs in the amount of $2,027.15, which includes a $750 administrative fee and the cost of the hearing transcript. FINRA Department Of Enforcement, Complainant, v. Harry W. Hunt, Respondent (FINRA Hearing Panel Decision, 2009018068701, October 17, 2011).

Bill Singer's Comment

I'm not going to defend or mitigate Hunt's misconduct. Set against the canvass of the Great Recession, what he did may be better understood; however, millions of Americans were faced with similar stress and took their lumps without engaging in fraud.

The core of the charges against Hunt is that he submitted false paperwork - to Sallie Mae and to Wells Fargo. Keep in mind that FINRA ought not be so high and mighty in judging Hunt for that transgression. Just the other day, we learned that FINRA has its own history of fudging documents and fabricating events. See, SEC Slams FINRA for Submitting Doctored Records (Street Sweeper, October 27, 2011).

In these days of hoped-for economic recovery, there seems to be more than enough hypocrisy to go around. Which may have been what got us into this mess to start with.

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