Morgan Stanley Smith Barney LLC Sanctioned by FINRA for Failure to Supervise (1)Publicly available records provided by the Financial Industry Regulatory Authority (FINRA) indicate that broker-dealer, Morgan Stanley Smith Barney LLC (hereinafter “Morgan Stanley”) (CRD # 149777) was recently sanctioned by FINRA’s Department of Enforcement. The sanction occurred as a result of an investigation into its failure to supervise a broker who made unsuitable recommendations of short-term trades of corporate bonds and preferred securities. Accordingly, the Law Office of Kevin J. Deloatch, Esq. is interested in speaking to investors who have complaints regarding Morgan Stanley.

Registration Background for Morgan Stanley Smith Barney LLC

Morgan Stanley became a FINRA member in 2009. The Firm was created when the Global Wealth Management Group of Morgan Stanley & Co. LLC (CRD No. 8209) merged with the Smith Barney Division of Citigroup Global Markets Inc. (CRD No. 7059) through a joint venture.  It is headquartered in Purchase, NY and offers a range of broker dealer services, including sales and trading; investment banking; and research. It currently has approximately 23,000 registered representatives and 730 branches.

FINRA’s Allegations against Morgan Stanley Smith Barney LLC

FINRA’s investigation led to Morgan Stanley entering into a Letter of Acceptance, Waiver and Consent (AWC) with FINRA on August 12, 2020. According to the AWC, Morgan Stanley consented to, without either admitting to or denying, the following findings by FINRA’s Department of Enforcement:

  • “From January 2012 through December 2017 (the “Relevant Period”), Morgan Stanley failed to reasonably supervise a registered representative [KG] who recommended short-term trades of corporate bonds and preferred securities in the accounts of ten customers”;
  • “Specifically, on hundreds of occasions during the Relevant Period, KG recommended that the customers buy, and then promptly sell, corporate bonds or preferred securities, which due to their upfront sales charges, were typically only suitable for customers if held long-term”;
  • “During the Relevant Period, Morgan Stanley used a number of automated alerts to identify trading activity and accounts that warranted further review by a supervisor, including alerts that identified accounts in which the trading exceeded certain turnover and cost-to-equity ratios”;
  • “From January 2012 to December 2014, KG’s trading in the accounts of the ten affected customers generated nearly 100 alerts reflecting that the trading in these accounts exceeded the Firm’s thresholds for potentially excessive turnover and cost-to-equity ratios”;
  • “In response to the alerts, Morgan Stanley failed to take reasonable steps to review red flags and understand the potential risks and rewards associated with KG’s recommendations or to determine whether those recommendations were suitable”;
  • “Collectively, KG’s trading in the accounts of the ten affected customers caused the customers to suffer losses of more than $900,000”;
  • By virtue of the above, Morgan Stanley violated NASD Rule 3010 regarding supervision, FINRA Rule 3110 regarding supervision and FINRA Rule 2010 regarding standards of commercial honor and principles of trade.

FINRA Sanctions Morgan Stanley Smith Barney LLC

As a result of such violations and in addition to the above described findings and conclusions, FINRA’s August 12, 2020 AWC also indicates that Morgan Stanley consented to the following sanction(s):

  • Censure;
  • A fine of $175,000.00; and
  • Restitution to the customers in the amount of $774,574.08, plus interest.

Morgan Stanley Smith Barney LLC has a History of Regulatory Actions

In addition to the findings of FINRA’s Department of Enforcement, FINRA BrokerCheck for Morgan Stanley (pages 44 – 196) reveals it has a history of regulatory actions being brought against it, including but not necessarily limited to the following:

  • On July 7, 2020 Morgan Stanley entered into an AWC with FINRA regarding inaccurate options transaction reporting information. As a result, it agreed to the sanctions of censure and a $875,000.00 fine.
  • On May 12, 2020, the Securities & Exchange Commission (SEC) brought administrative proceedings against Morgan Stanley regarding the marketing and client communications related to its WRAP fee programs. It alleged Morgan Stanley willfully violated certain sections of the Investment Advisers Act of 1940. Morgan Stanley entered into a settlement with the SEC in which it agreed to the sanctions of censure, a fine in the amount of $5,000,000.00 and a cease and desist.
  • On March 25, 2020, Morgan Stanley entered into an AWC with FINRA. Morgan Stanley consented to the entry of findings that it failed to timely report fixed income transactions. As a result, it agreed to the sanctions of censure and a fine in the amount of $300,000.00.
  • On December 26, 2019, Morgan Stanley entered into an AWC with FINRA. Morgan Stanley consented to the entry of findings that it failed to establish, maintain and enforce written supervisory systems/procedures with respect to the uniform gifts to minor act (UTMA). As a result, it agreed to the sanctions of censure and a fine in the amount of $300,000.00.

Morgan Stanley Smith Barney LLC has a History of Customer Initiated Arbitrations

In addition to the findings of FINRA’s Department of Enforcement, FINRA BrokerCheck for Morgan Stanley (pages 197 – 250) reveals it has a history of being named as a respondent in customer-initiated arbitrations, including but not necessarily limited to the following:

  • On July 23, 2009, a customer initiated an arbitration against Morgan Stanley. The customer alleged breach of fiduciary duty, omissions of facts suitability, breach of contract, failure to supervise and negligence. The customer further alleged damages in the amount of $339,439.00. On February 15, 2011 a panel issued an award against Morgan Stanley in the amount of $105,000.02.
  • On September 15, 2009, a customer initiated an arbitration against Morgan Stanley. The customer alleged breach of fiduciary duty, suitability, unauthorized trading, failure to supervise and negligence. The customer further alleged damages in the amount of $150,000.00. On November 18, 2010 a panel issued an award against Morgan Stanley in the amount of $136,112.00.
  • On September 15, 2009, a customer initiated an arbitration against Morgan Stanley. The customer alleged negligence and failure to execute an order. The customer further alleged damages in the amount of $165,000.00. On January 11, 2011 a panel issued an award against Morgan Stanley in the amount of $85,507.00.
  • On October 1, 2009, a customer initiated an arbitration against Morgan Stanley. The customer alleged breach of fiduciary duty, misrepresentation, suitability, breach of contract and negligence. The customer further alleged damages in the amount of $480,000.00. On February 22, 2011 a panel issued an award against Morgan Stanley in the amount of $124,156.01.

If you or someone you know has or had a brokerage account with Morgan Stanley Smith Barney LLC and have concerns regarding losses in your investments or possible sales practice violations including fraud, you may be entitled to recover lost funds. The Law Office of Kevin J. Deloatch, Esq. has an extensive securities law practice and over 30 years of experience on Wall Street. Call today at (646) 792-2156 for a free consultation. The time to file your claim may be limited so you should call today to avoid delay.