New York state attorney general Eliot Spitzer announced a settlement with Morgan Stanley DW Inc., a wholly owned subsidiary of Morgan Stanley, today for failing to supervise one of its brokers who defrauded 15 customers of more than US$740,000.

Spitzer’s investigation found that a Morgan Stanley broker mismanaged customer accounts by engaging in excessive, unauthorized and unsuitable trading, signing wire transfers and new account documents without customer authorization and failing to inform her clients of the risks of trading on margin. Her excessive trading generated large commissions for her, at her clients’ expense. Many of the defrauded customers were senior citizens or people with little knowledge of the stock market, it found.

The attorney general concluded that Morgan Stanley failed to supervise the broker properly, failed to notify her clients of her wrongdoing, and failed to conduct an internal review of her accounts, even though the firm was on notice that she was mishandling accounts. Indeed, Morgan Stanley settled two arbitration claims with her clients, one for US$1.9 million and the other for US$300,000. In March of 2003, the NASD barred her from associating with any NASD member firm.

Under the terms of the settlement, Morgan Stanley has agreed to pay restitution in the amount of US$740,964.18, and costs and penalties totaling US$300,000.