The securities lawyers of Gana LLP are following the case against broker Jeffrey Kluge (Kluge) who pleaded guilty to two counts of bank fraud in the state of Minnesota. A plead agreement was filed with the U.S. District Court in Minnesota on March 29, 2017. Kluge entered the securities industry in 1991 and remained with Merrill Lynch, Pierce, Fenner & Smith Inc. for the entirety of his career. Kluge started a scheme to create fraudulent Merrill Lynch account statements to falsely secure collateral for multi-million lines of credit. Kluge was able to carry out this scheme by creating a fake domain name, www.mymerrillonline.com, and fake email address, firstname.lastname@example.org, to send the falsified account statements to Platinum Bank. A false Merrill Lynch identity was used as a cover for the email address. Kluge ran this fraudulent scheme for 15 years, starting in 2001 to November 2016.
In 2001, Kluge received a line of credit for $150,000 from Alliance Bank by putting up municipal bond funds as collateral. These bond funds were substantiated by falsified account statements that hid the fact that the same bonds were already pledged to Merrill Lynch loans previously obtained by Kluge. The outstanding balance of Alliance Bank line of credit was at $6 million in November 2016.
Utilizing the same scheme for Alliance Bank, Kluge was able to secure a $1 million line of credit from Platinum Bank in Minnesota. He procured this line of credit by putting up the same assets used for Merrill Lynch and Alliance Bank. The Platinum Bank line of credit balance was at $2.7 million as of November 2016.
In November 2016, Kluge was the subject of an ongoing investigation alleging that Kluge defrauded creditors. This investigation is still pending. Around the same time, Kluge was subject to a customer compliant alleging unauthorized trading conducted from October 2016 to November 2016 by Kluge on his customer’s account. This claim was settled for the amount of $40,000.00.
Aside from pleading guilty to the criminal felony charge, according to the Financial Industry Regulatory Authority’s (FINRA) BrokerCheck records, Kluge was suspended from acting as a broker starting on April 10, 2017. Kluge failed to respond to FINRA’s request for information.
A brokerage firm owes a duty to all of its customers to properly monitor and supervise its employees. The duty to supervise is a critical component of the securities regulatory scheme. Regulatory authorities such as the SEC and FINRA have steadily heightened the supervisory obligations of brokerage firms in recent years. Supervisors have an obligation to respond vigorously to indications of irregularity, often times referred to as “red flags.” A supervisor cannot disregard red flags and must act decisively and specifically prevent improper conduct by their brokers. The importance of proper supervision is manifested in various types of securities activities. Brokerage firms are responsible for monitoring a broker’s investment recommendations to clients, outside business activities, and representations to investors among other obligations. In addition, brokerage firms are responsible for conducting due diligence on the securities products they sell and devising a written supervisory system to achieve compliance with the securities laws.
Unauthorized trading occurs when a broker sells, buys, or exchanges, securities without the prior consent or authority from the investor. Unless an investor has given the broker discretion to make trades in the account, the broker must first discuss all trades with the investor before executing them. The SEC has found that unauthorized trading violates just and equitable principles of trade and constitutes violations of Rule 10b and 10b-5 due to its fraudulent nature. As one court summed up, no omission could be more material than the failure to inform the investor of his purchases and sales.
Gana LLP’s securities fraud attorneys represent investors who have suffered securities losses due to the mishandling of their accounts due to claims of fraud and negligence. The majority of these claims may be brought in securities arbitration before FINRA. Our consultations are free of charge and the firm is only compensated if you recover.