FINRA Publishes Mitigation Statement in Elderly Client Conversion Case

May 23, 2016

An elderly client gives her stockbroker $25,000. Is it a loan? Maybe. Is it an investment? Could be. What did that $25,000 obtain for the client? Supposedly a piece of a business. Except the business didn't exist.The odd thing -- the unsettling thing -- is not only does the stockbroker think that there is some mitigation to be presented on his behalf but, inexplicably, FINRA seems to share his belief.

Case In Point

For 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, Miguel Angel Hernandez submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Miguel Angel Hernandez, Respondent (AWC  2015045623201, May 17, 2016).

The AWC asserts that in 2004 Hernandez became registered with FINRA member firm Thrivent Investment Management, Inc.

The Elderly Church Lady

The AWC alleges that Hernandez had met an elderly customer (referred to in the AWC as "KH") through his church and told her that he needed money to cover the expenses of his tax business. In response to that request, on August 31, 2010, the elderly client gave Hernandez $25,000 in cash in return for a 2% interest in the tax business after its fifth year of existence and $1,081.56 in quarterly payments for at least 12 quarters up to a a 40 quarters maximum. 
The terms of the above transaction were set forth in a document Hernandez titled "Silent Partnership,"  which stated that the partnership was "unbeknown to all with the exception of [the elderly client]" and Hernandez. 


Another "unbeknown" aspect of the Silent Partnership transaction was that Hernandez didn't have a tax business. 

And yet another "unbeknown" aspect of the transaction was FINRA's contention that the elderly client's $25,000 was used solely for personal matters by Hernandez.

Fully Repaid

The AWC concedes that sometime after the above transaction was discovered, in June 2015, Hernandez fully repaid the client her $25,000.


According to online FINRA BrokerCheck records as of May 23, 2016, Thrivent "Discharged" Hernandez on May 14, 2015, based upon allegations that:


A Portion?

Perhaps you noticed that interesting discrepancy? In FINRA's online BrokerCheck file, Hernandez's former employer asserts that the stockbroker had only used a "portion" of the $25,000 for personal expense; however, in the AWC, the self-regulatory organization asserts that "Contrary to what he told KH, Hernandez did not have a tax business and instead converted KH's funds for his personal use."

If the fact pattern is accurately set forth in the AWC, then I think that FINRA has it right: When you extract $25,000 based upon the misrepresentation the the funds are going to a non-existent tax business, you haven't used a mere portion of those funds for personal expenses; to the contrary, you have converted the $25,000 for personal purposes other than use in the bogus business. If Hernandez truly intended to open a tax business but his plans fell through, then at the least, he should have renegotiated the deal with the elderly investor or immediately returned the $25,000. Then there's that other intriguing inconsistency: the AWC says that Hernandez gave the elderly client a 2% interest in the tax business but the BrokerCheck filing by Thrivent discusses a 12% interest. Which was it?


FINRA deemed the Silent Partnership transaction to constitute a conversion of the elderly client's funds by Herndandz in violation of FINRA Rules 2010 and 2150(a). In accordance with the terms of the AWC, FINRA imposed upon Hernandez a Bar from associating with any FINRA member firm in any capacity.

Mitigation Statement

In connection with his FINRA settlement, Hernandez submitted a so-called Mitigation Statement, which is appended to the AWC:

Mitigation Statement


After KH's daughter made a complaint with Thrivent in April of 2015, my manager asked me about my arrangement with KH and I told him everything. I subsequently paid KH all of the money I owed her.

This is the only time I ever did anything like this. Beginning in June of 2011 and every quarter after that, I paid her $1100. Other than this incident. I have a good record and have never been the subject of any other customer complaint.

Bill Singer's Comment

Missing Section D

Frankly, I'm a bit puzzled by FINRA's decision to accept and append Hernandez's above "Mitigation Statement" to his AWC. In recent regulatory practice, FINRA includes in its AWCs a provision under a Section D heading in "III. OTHER MATTERS" that generally provides this form of an admonition:

[Respondent] may attach a Corrective Action Statement to this AWC that is a statement of demonstrable corrective steps taken to prevent future misconduct. [Respondent] understands that it may not deny the charges or make and statement that is inconsistent with the AWC in this Statement. This Statement does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA or its staff

III. OTHER MATTERS of Hernandez's AWC, ends with a Section C and that there is no Section D language whatsoever about a Corrective Action Statement or a Mitigation Statement.

The Unattached Policy

According to what seems to be a 1998 NASD (FINRA's predecessor) document: "Regulatory Short Takes,":

NASD Clarifies Policy On Corrective Action And Mitigation Statements

Respondents in a settled disciplinary action may submit a Corrective Action Statement and/or a Mitigation Statement to NASD Regulation. This article clarifies the NASD policies regarding such Statements.

A Letter of Acceptance, Waiver and Consent (AWC) permits a respondent in an NASD Regulation disciplinary action to settle the matter prior to the filing of a formal complaint. A Corrective Action Statement may be attached to the AWC, which is filed with the SEC and available to the public, provided such statement is: (1) limited to demonstrable steps taken to correct a problem associated with the disciplinary action; (2) generally no longer than 2-3 pages; and (3) contains the following legend:

This Corrective Action Statement is submitted by the Respondent. It does not constitute factual or legal findings by NASD Regulation, Inc., nor does it reflect the views of NASD Regulation, Inc., or its staff.

Separately, respondents may submit a Mitigation Statement for consideration by NASD Regulation and the National Adjudicatory Council. Generally, such Statements are used to describe mitigating circumstances surrounding the violation for the decision maker to consider in its review of the terms of a settlement. Unlike Corrective Action Statements, Mitigation Statements are not attached to the AWC or public order.

Respondents may also settle a matter after the complaint is filed by submitting an Offer of Settlement. While both Corrective Action and Mitigation Statements may be submitted to NASD Regulation in connection with Offers of Settlements, these Statements are not attached to the final Order Accepting the Offer of Settlement, which is filed with the SEC and available to the public.

NASD Regulation will not accept Corrective Action or Mitigation Statements that deny the allegations or are inconsistent with the findings in the settlement.

Questions about this article may be directed to Katherine A. Malfa, Director, Enforcement, NASD Regulation, Inc., at (202) 728-2853.

Mitigating How?

What are we to make of FINRA's rules and policies when it comes to the attachment of Hernandez's "Mitigation Statement" to his AWC? 

For starters, there is no Section D provision addressing the appropriateness and limits of Hernandez's Mitigation Statement. Although the default "Statement of Corrective Action" provision in FINRA AWCs admonishes that such a statement "may not deny the charges" or be "inconsistent with the AWC, " no such language appears in Hernandez's AWC concerning his use of a so-called Mitigation Statement.

Even more odd, FINRA's online 1998 statement addressing the proper use of both a "Statement of Corrective Action" and a "Mitigation Statement" is unequivocal in noting that "Unlike Corrective Action Statement, Mitigation Statements are not attached to the AWC or public order;" however, attached to the online version of Hernandez's AWC is his Mitigation Statement!  

I'm having a tough time reconciling FINRA's policies with the publication by the self-regulatory organization of Hernandez's Mitigation Statement. In my opinion, the lack of any concession in the statement by Hernandez that he had lied about the existence of the tax business and the inappropriateness of involving an elderly client in a silent partnership is inconsistent with FINRA's characterization of the fact pattern. Then there's that truly jaw-dropping inconsistent by FINRA itself in promulgating a policy that unequivocally prohibits the attachment to an AWC of a Mitigation Statement but then attaching just such a statement to an AWC.

At the core of FINRA's allegations against Hernandez is a troubling fact pattern involving an elderly client who gave her stockbroker $25,000 in August 2010 pursuant to a silent partnership. FINRA alleges that Hernandez secured the funds from his elderly customer based upon the representation that he needed the money for his tax business; however, FINRA asserts that no such business existed. All of which paints a picture of fraud rather than mere misunderstanding. Similarly, FINRA alleged that it was only after the client's daughter complained and the silent partnership transaction was discovered in 2015 that Hernandez repaid the balance outstanding on the $25,000 to the elderly client.

Hernandez seeks some credit for having made $1,100 in quarterly payments to the elderly client starting in June 2011. His argument in mitigation seems to be that he was paying back about $4,400 a year starting in 2011, which meant that by the time the elderly client's daughter blew the whistle on him in April 2015, he had purportedly repaid about $22,000. But what was going to be the disposition of the elderly client's 2% interest in what was a fabricated tax business? What would have happened if the elderly client had died sometime in 2010, 2011, or 2012 -- would Hernandez have fully repaid the loan/investment to the estate?

In the end, I think that FINRA has made a horrific error in judgment by accepting Hernandez's Mitigation Statement and I believe that the regulator has compounded that error by imbuing Hernandez's oblivious explanations with the appearance of credibility by attaching his Mitigation Statement to the official AWC.