Morgan Stanley rings in July 4th with $3.6 million, SEC penalty for poor WSPs
The Securities and Exchange Commission (SEC) says that failing to protect its personnel from misusing or misappropriating client funds will cost Morgan Stanley Smith Barney (Morgan Stanley) $3.6 million in penalties. At issue is that the firm failed to have reasonably designed policies and procedures in place to prevent its advisory representatives from misusing or misappropriating funds from client accounts. The Commission also found that while Morgan Stanley’s policies provided for certain reviews of disbursement requests, its policies and procedures were insufficient to detect or prevent potential misconduct.
The bad apple at the center of the storm
From as far back as 2009, Morgan Stanley permitted investment adviser representatives and registered representatives (a.k.a. financial advisors) to initiate third-party disbursements from client accounts of outgoing wire transfers and journals of up to $100,000 per day per account. The disbursements were based on the advisor’s filing of an electronic form that attested that he or she had received a verbal request from the client by phone or in-person. While some of those requests were reviewed prior to the disbursements, Morgan Stanley had inadequate policies and procedures in place to detect false documentation.
At the center of the storm were the nearly year-long misappropriations by Barry Connell, a Morgan Stanley financial advisor. From December 2015 until November 2016, Connell initiated over $7
million in unauthorized transactions out of the accounts of four of his advisory clients and filed nearly 90 internal electronic forms to initiate transfers from client accounts to a third party. On top of that, Connell also used nearly 20 client account checks. Where did the money go? To Connell, of course, to fund what the SEC calls “his lavish lifestyle.
The fraud went undetected until nearly a year later, the affected clients contacted Morgan Stanley with questions about their accounts.
Where was Morgan Stanley compliance?
Good question, wondered the SEC. “Investment advisers must view the safeguarding of client assets from misappropriation or misuse by their personnel as a critical aspect of investor protection,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office. “…Morgan Stanley fell short of its obligations in this regard.”
As a result, Morgan Stanley is paying a $3.6 million penalty, agreeing to accept a censure, a cease-and-desist order, and to undertakings related to the firm’s policies and procedures. The firm previously repaid the four advisory clients in full plus interest.
Barry Connell is also in trouble, facing SEC-filed fraud charges, and criminal charges by the U.S. Attorney’s Office for the Southern District of New York. Both sets of charges as to Connell remain pending.
Does compliance still pay?
Let’s see…hundreds or even a few thousand dollars to keep your firm on the straight and narrow? Or, 3.6 million, plus restitution, plus interest. Hmmmm. Is it worth it the exposure, fines, and worse? That’s a question only you can answer. But that’s also where Patrina can help. We’ve built a business 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, and records archiving specifically designed for the financial services community. Be smart. Be covered.