SEC Fines Morgan Stanley $15 Million for Enabling Millions in Adviser Theft
The U.S. Securities and Exchange Commission announced that it has charged Morgan Stanley Smith Barney LLC, or MSSB, with failing to reasonably supervise four investment advisers and registered representatives who stole millions of dollars of advisory clients’ and brokerage customers’ funds. Additionally, the SEC said the firm failed to adopt policies and procedures reasonably designed to prevent and detect such theft. To settle the charges, MSSB agreed to pay a $15 million penalty and accept certain undertakings.
According to the SEC’s order, MSSB failed to adopt and implement policies and procedures reasonably designed to prevent its financial advisers from using two forms of unauthorized third-party disbursements (automated clearing house, or ACH, payments and certain patterns of cash wire transfers) to misappropriate funds from advisory client accounts and brokerage customer accounts.
“Safeguarding investor assets is a fundamental duty of every financial services firm, but MSSB’s supervisory and compliance policy failures let its financial advisers make hundreds of unauthorized transfers from their customer and client accounts and put many other such accounts at significant risk of harm,” said Sanjay Wadhwa, acting director of the SEC’s Division of Enforcement. “However, today’s resolution also takes into account the firm’s several self-reports to, and substantial cooperation with, the Commission staff and its remedial efforts, including compensating the financial advisers’ victims and retaining a compliance consultant to conduct a comprehensive review of the relevant policies and procedures.”
According to the SEC’s order, until at least December 2022, MSSB did not have a policy or procedure to screen externally initiated ACH payment instructions to detect instances in which an MSSB financial adviser assigned to the account bore the same name as the beneficiary listed in the ACH payment instructions. This led to the firm failing to detect hundreds of unauthorized ACH transfers between May 2015 and July 2022 which benefitted the advisers.
The SEC reported that, between October 2007 and May 2019, Michael Carter misappropriated more than $6 million from four brokerage customers and an investment advisory client while employed as a registered representative at MSSB. Similarly, Jesus Rodriguez misappropriated or misused at least $3 million from the accounts of his MSSB clients between March 2014 and July 2021. Additionally, Rodriguez, along with Chingyuan “Gary” Chang and Douglas McKelvey, misappropriated more than $1.7 million through unauthorized, externally initiated ACH payments between May 2015 and July 2022.
Without admitting or denying the SEC’s findings, MSSB consented to the $15 million penalty, a cease-and-desist order, a censure and certain undertakings that include having a compliance consultant review all forms of third-party cash disbursements from customer and client accounts. MSSB previously entered into settlement agreements with the affected customers and clients to compensate them for their losses.
This is just the latest blow for the global financial services leader. In November, Morgan Stanley was fined $1 million for violating market access rules. A New York Southern District Court judge also recently turned down the company’s motion to reconsider a November 2023 ruling, which stated that the firm’s deferred compensation plan should be governed by federal laws.
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