Kai Chong Cheng of Tenafly, New Jersey, recently signed a consent order with the State of New Jersey agreeing to a five-year suspension from registration in New Jersey. In a related enforcement action, he has been permanently barred from the securities industry by FINRA.
Cheng worked at a Merrill Lynch branch office in New York City from 2005 until 2015. He then opened his own firm, Affinity Capital Management LLC, also in New York City.
According to the consent order Cheng entered into with New Jersey regulators, Cheng handled a total of six personal and business accounts for customers identified only by their initials, presumably a husband and wife. In July 2012 a lawyer for the clients sent a letter to Merrill Lynch complaining of losses of approximately $645,000 in the clients’ accounts.
Merrill Lynch’s review of the complaint revealed that Cheng frequently communicated with these clients via two personal email accounts – 175 times between March 2010 and July 2012 in violation of Merrill Lynch internal policies (and industry policies and procedures).
The investigation also revealed that in 2011 Cheng signed a note acknowledging that he owed the clients $145,000, that he had already made two payments to the clients totaling $25,000 and still owed them $120,000. At the same time Cheng also added the two clients as beneficiaries to a term life insurance policy that Cheng maintained. Cheng did not disclose these two transactions to Merrill Lynch at the time he entered into them with the clients.
Merrill Lynch issued Cheng a letter of admonition relating to the note and life insurance policy.
The clients then filed an arbitration claim against Merrill and Cheng in 2013. That claim was settled for $450,000 in 2014.
In 2015 Merrill discharged Cheng. The reasons for the discharge were communication with the clients via personal email, entering into undisclosed financial arrangements with the clients (the note and insurance policy) and unauthorized trading.
In a subsequent FINRA investigation, FINRA requested that Cheng appear to give testimony in an on the record interview (“OTR”). After several cancellations and rescheduled OTRs, Cheng ultimately failed to appear to testify. He then agreed to accept a permanent bar from the industry and signed a letter of acceptance, waiver and consent (“AWC”) in June 2015.
This case highlights several “red flags” of which customers should be aware. First, a broker should only email you through her firm’s email system. These systems are set up so that brokers’ emails to their clients can be reviewed and maintained. A broker should never send you an email on a personal email account.
Second, brokers are not permitted to give loans to or accept loans from customers (with a few exceptions, mainly based on a pre-existing personal relationships). Also, brokers are not permitted to share in either customers’ losses or gains in their brokerage accounts. The note that Cheng signed was probably his acknowledgement to the clients that he was responsible for some or all of their losses and he intended to pay them back. Such an arrangement is strictly prohibited in the securities industry.
If you have any questions or concerns regarding the handling of your account, or your relationship with your broker, call The Guiliano Law Group.
The New Jersey consent order also states that Merrill Lynch sent the customers seven letters over a two-year period discussing the losses in their account, the trading activity, etc. The clients never responded to any of the letters.
Their losses might have been less if they had. Alternatively, if Cheng told them to ignore the letters, that was another red flag they missed.
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