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, Fong I. Cheang submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Fong I. Cheang, Respondent (AWC 2010025119201, July 16, 2012).
Cheang entered the securities industry in 1996 with John Hancock Mutual Life Insurance Company, where she became registered as an Investment Company Products/Variable Contracts Limited Representative.
Thereafter, from May 23, 2005 through May 29, 2007, Cheang was registered with Citicorp investment Services ("Citicorp") until such time as the bulk transfer of that firm's employees toCitigroup Global Markets Inc. ("Citigroup"), where she was employed until her resignation on January 8, 2010. Hereafter, Citicorp and Citigroup will be individually and collectively referred to as "Citi".
Thereafter, Cheang was registered with Wells FargoInvestments, LLC, Primevest Financial Services, Inc. and HSBC Securities (USA).
The AWC asserts that Cheang had no prior disciplinary history.
On or about December 19, 2006, while employed at Citi, Cheang was indicted in the Los Angeles County Superior Court of California for two felonies related to her participation in an insurance fraud. On February 2, 2007, Cheang pled "not guilty" to both felony charges under California Penal Code Section 550(a)(1) and (5):
(a) It is unlawful to do any of the following, or to aid,abet, solicit, or conspire with any person to do any of the following:
(1) Knowingly present or cause to be presented any false or fraudulent claim for the payment of a loss or injury, including payment of a loss or injury under a contract of insurance. . .
(5) Knowingly prepare, make, or subscribe any writing, with the intent to present or use it, or to allow it to be presented, in support of any false or fraudulent claim.
2007 Plea Agreement
On May 11, 2007, Cheang entered into a plea agreement which provided, among other things, that she would pay $1,917 restitution and fully cooperate with any investigation. In connection with this plea agreement, the two prior felony charges against Cheang were amended to include the felony charge of Penal Code Section 550(b)(1):
(b) It is unlawful to do, or to knowingly assist or conspire with any person to do, any of the following:
(1) Present or cause to be presented any written or oral statement as part of, or in support of or opposition to, a claim for payment or other benefit pursuant to an insurance policy, knowing that the statement contains any false or misleading information concerning any material fact.
On the same day of her plea agreement, Cheang entered a No Contest plea to the 550(b)(1) felony charge. Subsequently, on November 26, 2008, as contemplated in the plea agreement and while she was still employed with Citi, Cheang withdrew her plea and, thereafter, all three criminal charges against her were dismissed.
SIDE BAR: The AWC asserts that subsequent to her employment at Citi, Cheang disclosed the criminal charges and her plea to Wells Fargo, Primevest and to her current employer, HSBC.
FINRA Reguatory Investigation
FINRA investigated whether Cheang had timely and adequately made disclosures to Citi in accordance with a number of FINRA's rules and regulations:
- Article V. Section 2 of the FINRA By-Laws: Every application for registration filed with FINRA shall be kept current by amendments to be filed no later than 30 days after learning of the facts or circumstances giving rise to the amendment.
- Form U4 Question 14A(1) " Have you ever (a) been convicted of or pled not guilty or nolo contender ("no contest") in a domestic, foreign,or military court to any felony? (b) been charged with any felony?
- NASD Rule 2110: Require members in the conduct of business to observe high standards of commercial honor and just and equitable principles of trade.
- Membership and Registration Interpretive Memorandum-1000-1: It is a violation and conduct inconsistent with just and equitable principles of trade to file with FINRA membership/registration information that is incomplete or inaccurate so as to be misleading. Similar proscriptions apply to the failure to timely correct such information following notice.
The AWC alleged that between May 11, 2007 (the date of the plea agreement) and November 26,2008 (the date of the dismissal of the charges), Cheang was subject to a statutory disqualification (as a result of pleading to the felonies). Notwithstanding, the AWC alleged that at no time during her employment with Citi did Cheang update her Form U4 to reflect that she had been charged with any felonies or that she had pled "no contest" to a felony.
During her tenure at Citi, Cheang's Form U4 reflected that she had not "been charged with any felony" and that she had not "been convicted or pled guilty or nolo contendere ("no contest") in a domestic, foreign, or military court to a felony." The AWC alleged that Cheang's failure to amend her Form U4 while associated with Citi resulted in the document containing inaccurate, false and materially misleading information.
In accordance with the above facts, the AWC alleged that Cheang violated Article V, Section 2 of the FINRA By-Laws, NASD Membership and Registration IM-1000-1 and NASD Rule 2110, and pursuant to the terms of the AWC, FINRA imposed upon Cheang a $5,000 fine and a 15-month suspension from association with any FINRA member in any capacity.
Although I fully appreciate the seriousness of a registered person's noncompliance with FINRA's criminal disclosure rules, I note that the self-regulatory organization did not charge Cheang with "willfully" failing to disclose - which, in and of itself, would have constituted a statutory disqualification. I infer from the more benign allegations in this case that FINRA gave some weight to Cheang's post-Citi disclosure of her criminal history and the relatively complex circumstances of her multiple charges, pleas, and withdrawn charges. Accordingly, I concur with FINRA that Cheang's untimely disclosures were violations and required sanctions.
Consequently, I have no problem with the $5,000; however, I'm not comfortable with the imposition of a 15-month suspension in all categories. Unless FINRA is prepared to offer more facts that have not been presented in the AWC, the suspension seems disproportionate in light of the non-willful nature of the matter. For example, I am unclear as to whether Cheang knew that she had to report the charges and/or plea, or whether she had received legal counsel to the contrary (be that right or wrong advice), or whether she believed that the plea discussions tolled her need to make timely disclosure (which would have been an erroneous understanding). Missing from the AWC and what I deem important, is a better sense of why Cheang failed to make the disclosures - I concede that her understanding would not have altered the violative nature of her omissions, but this missing puzzle piece materially impacts the fairness of the 15-month suspension. Given my understanding of the facts, a three to six month suspension would seem to have been more reasonable.
"Street Sweeper" has regularly covered these FINRA U4 criminal disclosure cases. They do not discriminate between large firms and indie/regionals. Folks at Merrill Lynch, Morgan Stanley, JP Morgan, Wells Fargo, Citigroup, and other major organizations are just as apt to fall victim to the intricacies of what needs to be disclosed and when as their counterparts at smaller shops. For more background, read these columns: