Free-Riding on Instant Deposits: The Hernandez Case

Updated October 2026, from the SEC's complaint and final judgment. First published July 2025.

Between November 2018 and January 2022, four men with ties to Copiague, on Long Island, took more than $2 million from one broker-dealer without putting any money into the accounts that lost it. The broker offered an instant deposit credit: start a transfer from a linked bank account, and you could trade with up to $5,000 while the transfer cleared. The scheme turned that credit into cash, one account at a time, across at least 600 accounts. The SEC's complaint calls it a sophisticated version of a traditional free-riding scheme.

On June 30, 2025, the court entered a final judgment against Eduardo Hernandez, who the SEC says masterminded it. If your firm extends any credit before a deposit clears, the complaint is worth reading closely. It describes the scheme's footprint in enough detail to build controls from.

How the Scheme Worked

The broker, called Broker A in the complaint, sold a subscription tier that came with an instant deposit credit equal to the requested transfer, up to $5,000. The bank transfer itself could take up to five business days.

Recruiters found people to open Broker A accounts, often through Instagram posts that promised easy cash. Recruits were typically paid $25 to $300 to open an account and link a bank account, and some were told to leave nothing in the bank account. They handed over their logins. Hernandez and a second principal, Christopher Flagg, typically paid the recruiters $300 to $500 for each account.

Then came the trade. From a "winner" account at a different broker, a principal offered deep out-of-the-money put options at an inflated price. A "loser" account at Broker A, funded only by the instant credit, bought them at that price. Minutes later, the winner account bought the same contracts back at about their real value, and the difference left Broker A as profit in the winner account.

The complaint gives examples. On October 7, 2020, Hernandez offered SINA Corp. puts with a $30 strike at $4.50 a contract. SINA was trading near $42.70 against a $43.30 buyout proposal, so those puts were close to worthless. A Broker A account opened by a recruit, which had started a $5,000 transfer that day, bought them. Minutes later, Hernandez bought them back at $0.25. The scheme's own accounts were the only trading in that options series that day.

The scheme in four steps: a transfer requested from an empty bank account, an instant credit of up to $5,000, a put bought at $4.50 and sold back at $0.25, and a reversed transfer that leaves the account at least $4,990 negative

In the complaint's examples, the bank transfers were reversed within days, and each loser account ended at least $4,990 negative. Broker A closed the accounts and absorbed the losses, and the crew opened new ones.

What the Case Cost Hernandez

The final judgment, entered on consent in the Eastern District of New York (No. 23-cv-08110), orders:

disgorgement of $525,355 and prejudgment interest of $122,996, deemed satisfied by the restitution order in the parallel criminal case;
a permanent bar on trading in any account he owns, controls, or can reach that doesn't hold settled cash at least equal to the trade;
for five years, no new brokerage account unless he first gives the firm a copy of the SEC's complaint and the judgment.

In the criminal case, all four men pleaded guilty to money laundering conspiracy between June 4 and July 18, 2024. Prosecutors described the victim as a global financial services company based in Menlo Park, California.

The Signals Were in the Data

Each of these accounts looked ordinary on its own: a new customer, a linked bank account, a transfer request. The pattern shows only across accounts, and the complaint describes several things a broker offering instant credit could have watched for.

Shared devices. From about February 2020 to February 2021, at least 244 Broker A accounts were opened and traded for the scheme, and only 14 devices logged in to trade them. Broker A already recognized new devices: it sent a two-factor code whenever an account logged in from one.
Transfers sized to the limit. Most of the scheme's accounts asked for close to the $5,000 cap.
Trading within minutes of the first transfer request. Each loser account in the complaint's examples began trading moments after its transfer started and spent the whole credit that same day.
Off-market options prints. A new account bought a nearly worthless put at many times its value, in a series with no other volume, and sold it back minutes later for a fraction of the price.

None of these proves fraud alone. Together they describe a loser account well enough to hold the credit before the options trade. After that trade, the money is already gone.

Instant Credit Is a Loan

The complaint calls the instant deposit credit essentially a loan to the account holder while the transfer is pending, and that's the right way to supervise it. If the credit goes out before anyone checks who controls the account and the bank account behind it, the firm is lending $5,000 to a stranger.

The SEC's other recent free-riding cases exploit the same timing gap with different tools. Rey Acosta moved $1.5 million into his brokerage account from a bank account he knew lacked the funds and traded before the transfers reversed (we covered it in When $93K in Profits Trigger a Permanent Injunction). Aaron Freeman deposited unfunded checks, some into accounts in relatives' names (our post on the Freeman case). Hernandez's version reached 600 accounts because recruits, not the principals, held the accounts that took the losses.

Two Kinds of Free-Riding

In a cash account, free-riding usually means something narrower: buying a security and selling it before paying for it. Regulation T answers that with a 90-day freeze on the account. On a DVP trade, where the customer pays with funds held at the receiving firm, the executing broker can rely on that firm's written statement that the funds are there. That statement is the Letter of Free Funds, and Freefunds Verified Direct (FVD) carries those letters between executing brokers and custodians.

That control wouldn't have stopped Hernandez. His loser accounts traded on Broker A's own credit, and the question that mattered was who controlled them, not where the cash sat. The controls for this kind of scheme belong at account opening, in login and device data, and in options surveillance.

This post is for informational purposes only and does not constitute legal advice. For guidance on specific regulatory obligations, consult your counsel or compliance advisor.