Merrill Lifer Admits to Bank Fraud But Clients Don’t Know He’s Gone
A 25-year Merrill Lynch veteran in St. Paul, Minnesota, has signed a plea agreement with the federal government acknowledging two counts of bank fraud in which he borrowed millions of dollars over 15 years using the same muni bond fund portfolio as collateral that he had pledged to Merrill.
Jeffrey T. Kluge’s plea, which requires him to pay two community banks $8.67 million in restitution, serve five to six-and-a-half years in prison and pay a fine as high as $250,000, has created waves in the small Merrill office where he was a senior vice president producing more than $2 million, according to a source familiar with the events.
Kluge resigned in December before Merrill was aware of the federal investigation, according to his BrokerCheck history and another source familiar with the departure. His long-time partner Jeffrey Rathmanner, who had been with Merrill since 1995, left in the past few weeks and Merrill is expected to file a separation announcement on his regulatory records soon. Rathmanner, who was not a defendant in the federal case, did not respond to a message left at his home phone number.
Kluge’s title of senior vice president indicates that he generated $1 million in production credits and $1.5 million in revenue, according to Merrill’s 2017 compensation plan
The source said the team’s customers have not been informed of Kluge’s departure or of the plea agreement, and that accounts are being served by Michael Levitt, a broker who joined Merrill through its training program in 2011. “We have no comment,” said the team’s sales associate.
Brokers at the relatively small St. Paul branch received an e-mail this month telling them to refer any client questions to the branch administrator if they have specific questions on the departures and to deter them from moving their accounts.
“The primary objective is to reassure the client that Merrill Lynch’s attention to their financial matters will continue uninterrupted,” according to the message from Beverly Connelly, the administrator, that was read to AdvisorHub. “Remind them that they are in capable hands and that they still have the benefit of all of Merrill Lynch’s assets and resources…..”
A Merrill spokesman declined to comment on any aspect of the situation, including whether Merrill is facing any litigation or regulatory issues and what its policies are on book allocation when two-thirds of a team leave. Connelly and St. Paul branch manager Chad Zawacki were out of the office on Wednesday, a person answering their phones said. They did not respond to messages for comment.
Kluge, who received a suspension letter from Finra on March 17 for failing to respond to the self-regulator’s request for information, did not respond to a call for comment. If he fails to request termination of the suspension that took effect last week he will be permanently barred from working for a U.S. broker-dealer under Finra rules.
Kluge’s lawyers at the Minneapolis law firm of Kelley, Wolter & Scott did not return a request for comment.
The broker obtained periodic line-of-credit increases from St. Paul-based Alliance Bank between April 2001 and November 2016, and had an outstanding balance of more than $5.989 million in November 16, according to the plea agreement filed in the U.S. District Court in Minnesota. Beginning in 2007, he obtained another credit line from Oakdale, Minn.-based Platinum Bank that was regularly renewed and had a draw-down loan balance of more than $2.68 million as of last November.
He provided doctored Merrill Lynch statements to both banks, giving Platinum a fictitious employee’s name and email, firstname.lastname@example.org, to substantiate his purported muni bond fund holdings at Merrill. He concealed from each bank that he was using the same alleged collateral for each of the lines, as well as the fact that he had already pledged the assets in his Merrill account to back loans he had received from the broker-dealer, according to the plea agreement.
“Merrill Lynch held a security interest in the assets,” the agreement said.
Kluge’s BrokerCheck record indicates that he may have been scurrying in recent months to generate money to cover his loans. Five customers between October and November 2016 alleged that he made unauthorized trades in their account. Each claim was settled for $40,004.47 with Merrill covering each one, according to the regulatory database.
A Minnesota state court last November notified Finra that Kluge was a defendant in two breach-of-contract/fraud cases related to selling property “with intent to delay or defraud creditors,” according to BrokerCheck. At least one of the cases was initiated on Nov. 22 by Alliance Bank, according to Debra Kosch, a bank spokeswoman.
“On November 23, the court issued an order in favor of the bank attaching Kluge’s assets,” she wrote in an email. “Alliance Bank remains a well-capitalized and profitable bank.”
State securities regulators also are investigating. “We are aware of Finra’s actions and are taking appropriate steps,” Julia Miller, a spokeswoman for the Minnesota Department of Commerce, the state securities regulator, wrote in an e-mail.