One broker's alleged misconduct is costing Morgan Stanley millions.
The wirehouse is due to pay $3.6 million to SEC charges that it failed to detect or prevent fraud among its brokerage ranks.
Morgan Stanley, which has roughly 15,000 brokers, was cited by the regulator for lax oversight after one of its advisors allegedly misappropriated more than $5 million from client accounts for his own benefit.
"Investment advisors must view the safeguarding of client assets from misappropriation or misuse by their personnel as a critical aspect of investor protection. Today’s order finds that Morgan Stanley fell short of its obligations in this regard," Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office, said in a statement.
For nearly a decade, Morgan Stanley permitted its 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 SEC says. This was based on the advisor's attestation on an internal electronic form that the client gave the advisor a verbal request by phone or in-person.
Morgan Stanley's policies were insufficient, the SEC claims, and contributed to its inability to detect alleged misconduct by Barry F. Connell, a barred advisor by FINRA in 2017, according to BrokerCheck records.
While employed as an advisor at the wirehouse, Connell initiated more than $7 million in unauthorized transactions by making false attestations on approximately 90 internal electronic forms to initiate third-party transfers between client accounts and third-party wires from client accounts,
The regulator charged Connell last year with misappropriating more than $5 million from client accounts for his own benefit.
Connell is also facing criminal charges filed last year by federal prosecutors. Both the SEC case and the criminal charges, which are being heard in federal court in New York, are pending.
Jesse Siegel, a New York-based lawyer representing Connell, declined to comment on the charges facing his client.
Richard Chambers is the CEO of Richard F. Chambers & Associates, a global advisory firm for internal audit professionals, and also serves as senior advisor of risk and audit at
Joe Nestlerode is a partner at Alpha FMC with over 28 years of industry experience in senior technology and business roles in the wealth management industry.
He has overseen large strategic engagements including M&A, advisor platform development, client portal design and development and capability optimizations across front-, middle- and back-office functions. Prior to joining Alpha FMC, he was a product and technology executive for the RIA, IBD and 1099 channels at Wells Fargo Advisors.
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Disbursement requests were reviewed by a business unit at Morgan Stanley dedicated to reviewing money movements, according to the SEC.
This fell short of what was needed, the SEC claims. Morgan Stanley didn't require a client signature or letter of authorization. It also did not require a call back to the client, not even on a sample basis, the SEC says.
"Similarly, Morgan Stanley did not record calls, nor did it require calls requesting such third-party disbursements to be made to firm telephones for which records might be obtained to verify that a call had taken place at the date and time specified on the Verbal Request Form," the regulator says.
In November 2016, one of the allegedly defrauded client's representatives contacted Morgan Stanley to question transactions in accounts. After conducting an internal investigation, Morgan Stanley terminated Connell and reported the alleged fraud to the SEC and other law enforcement agencies, the regulator says.
Without admitting or denying the findings, Morgan Stanley consented to the SEC's order and to revise company policies and procedures. The firm has already repaid in full plus interest the clients purportedly harmed by Connell's conduct, the SEC says.
"Morgan Stanley is pleased to reach this settlement with the SEC. Morgan Stanley has strengthened, and will continue to improve its controls against fraudulent conduct, to ensure the safety of our clients’ assets," a company spokeswoman said in a statement.
