U.S. brokerage giant Morgan Stanley Smith Barney LLC is being sanctioned for supervisory shortcomings that failed to prevent four of its advisors from using the firm’s back-office systems to steal millions of dollars from their clients.
On Monday, the U.S. Securities and Exchange Commission (SEC) charged the firm over its failure to adopt policies and procedures that were reasonably designed to prevent employees from using the firm’s wire transfer procedures and automated clearing house (ACH) payments to misappropriate money from the firm’s clients. It alleged that four reps — Michael Carter, Gary Chang, Douglas McKelvey and Jesus Rodriguez — exploited these weaknesses to divert millions of dollars of clients’ money between 2015 and 2022.
“Morgan Stanley … did not have any policy or procedure that screened the ACH payment instructions [it] received from the originating financial institution for the name of the beneficiary of the ACH payments, which allowed Rodriguez, McKelvey and Chang to initiate ACH payments to pay their own credit card bills or otherwise improperly transfer funds for their own benefit,” the SEC alleged.
The firm also allegedly failed to implement policies to prevent and detect reps using unauthorized wire transfers to divert funds from client accounts to a third-party external account.
According to the SEC’s order, in 2015, the firm implemented fraud detection software that it thought would monitor for these kinds of unauthorized wire transfers, but the system was never actually calibrated to detect this sort of activity.
After this failing was discovered, the firm self-reported it to the SEC in 2021, and it provided evidence of suspected misappropriation to law enforcement, the regulator noted. The firm also compensated harmed clients for their losses.
Morgan Stanley agreed to settle the SEC’s charges.
Without admitting or denying the allegations, the firm agreed to pay a US$15-million penalty and to accept a censure, a cease-and-desist order and to certain undertakings.
It has already implemented remedial recommendations from an external compliance consultant that was hired to address weaknesses in its internal controls and procedures, the regulator noted.
“Safeguarding investor assets is a fundamental duty of every financial services firm, but [Morgan Stanley’s] supervisory and compliance policy failures let its financial advisors 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, in a release.
“However, [Monday’s] resolution also takes into account the firm’s several self-reports to, and substantial co-operation with, the Commission staff and its remedial efforts, including compensating the financial advisors’ victims and retaining a compliance consultant to conduct a comprehensive review of the relevant policies and procedures,” he added.