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Morgan Stanley closes 2018 with mega fines

What a way to ring in the new year! Two reports say Morgan Stanley is on the hook for $14.2 million in fines and payouts for supervisory and anti-money-laundering failures.

According to Financial Advisory IQ, the Financial Industry Regulatory Authority (FINRA) arbitration panel has ordered the wirehouse to pay $3.3 million to James Grove, a 2009 winner of a $168 million Mega Millions lottery, and $879,000 to Asante Samuel, an NFL cornerback for failure to supervise advisor Aaron Parthemer, who had worked for Morgan Stanley from 2009 to 2011, and at Wells Fargo Advisors from 2011 to 2015.

Parthemer entered the financial services industry in 1994 and resigned from Wells Fargo following his bar from the industry over unapproved business activities, making loans to customers, false written responses, and other inappropriate acts.

Supervisory failures

According to a report that also appeared in the Wall Street Journal, Grove and Samuel had been clients of Parthemer and, on his recommendation, had invested in a nightclub business which closed in 2014. In 2016, Groves and Samuel were two of six parties who filed an arbitration claim seeking $7.8 million in damages from Wells Fargo and Morgan Stanley over their failure to supervise Parthemer. Wells Fargo settled their exposure in April 2017 and both firms have reportedly paid out over $7 million to Parthemer’s former clients, which included about 40 professional athletes according to the Securities and Exchange Commission.

Morgan Stanley double-header

FINRA also fined Morgan Stanley (Smith Barney LLC) $10 million for anti-money-laundering (AML) and additional supervisory failures over a five-year period.

The Authority found that Morgan Stanley’s AML program failed to meet the requirements of the Bank Secrecy Act because:

1) Its automated AML surveillance system did not receive critical data from several systems which undermined its surveillance of billions of dollars of wire and foreign currency transfers, including transfers two and from countries with known high money-laundering risks;

2) Insufficient resources were allocated to review alerts generated by Morgan Stanley’s automated AML surveillance system which resulted in the firm’s analysts often closing alerts without sufficiently conducting and/or documenting investigations of potentially suspicious wire transfers; and

3) Customers’ deposits and trades in penny stocks were not well monitored for suspicious activities over a period in which customers deposited approximately 2.7 billion shares of penny stock which generated subsequent sales of approximately $164 million.

Lack of coordinated oversight

According to FINRA, Morgan Stanley failed to establish and maintain a supervisory system reasonably designed to comply with Section 5 of the Securities Act of 1933. The Authority also found that the firm failed to implement its policies, procedures, and controls to ensure that it conducted risk-based reviews on a periodic basis of accounts it maintained for certain foreign financial institutions.

Susan Schroeder, FINRA Department of Enforcement Executive Vice President, noted that “FINRA continues to find problems with the adequacy of some firms’ overall AML programs, including allocation of AML monitoring responsibilities, data integrity in AML automated surveillance systems, and firm resources for AML programs.”

The Morgan Stanley matter arose out of firm examinations and cause examinations referred to FINRA by the Authority’s AML Investigations Unit. In determining an appropriate monetary sanction, FINRA did consider the corrective measures the firm has been taking.

Lack of oversight still cost Morgan Stanley big bucks

Morgan Stanley’s “corrective measures” are still akin to “locking the barn door after the horse has been stolen.” That’s where Patrina comes in. We’ve built our business based on helping organizations stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective and comprehensive, 8-module compliance solution, and compliant data capture, file storage, records archiving, and designated third-party services specifically designed for the financial services community. Be smart. Be covered.

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