Morgan Stanley Smith Barney (MSSB) has agreed to settle with the Securities and Exchange Commission (SEC) by paying a penalty of $15 million in connection to a case involving four financial advisors who misappropriated funds from clients.
The settlement, disclosed on Monday, is tied to the firm’s inadequate measures to curb and identify such fraudulent activities.
According to the SEC’s findings, MSSB failed to implement appropriate policies to prevent its advisors from exploiting unauthorized third-party disbursements, including Automated Clearing House (ACH) payments and specific cash wire transfer patterns, to siphon money from customer accounts.
These financial advisors, based in Texas and California, executed numerous unauthorized transfers from the accounts of clients and customers for their personal gain.
MSSB was formed in 2009 through a partnership with Citigroup’s Smith Barney, with Morgan Stanley taking full ownership of the operation by 2013.
The SEC stated that until at least December 2022, MSSB lacked procedures to scrutinize externally initiated ACH payment requests. This oversight allowed many unauthorized ACH transfers to go undetected, notably between May 2015 and July 2022, where several transfers coincided with the advisors’ names on the accounts in question.
“Protecting investor assets is a core obligation for all financial service companies,” noted Sanjay Wadhwa, acting director of the SEC’s Division of Enforcement, in a press release. “Today’s settlement reflects the firm’s proactive self-reporting and substantial cooperation with the SEC, alongside their efforts to make amends, which includes compensating the victims of these advisors’ actions and employing a compliance consultant to thoroughly evaluate their policies.”
In addition to the financial penalty, MSSB has consented to a cease-and-desist order without admitting or denying the SEC’s conclusions. The firm faces a censure and must engage a compliance expert to scrutinize all methods of third-party cash disbursement from client and customer funds.
A representative from Morgan Stanley emphasized in a statement that these incidents were isolated and occurred several years prior. The spokesperson asserted, “We take such matters very seriously and have since strengthened our control framework with the assistance of outside experts. Our priority is our clients; each time we became aware of any wrongdoing, we conducted investigations, terminated the involved individuals, notified the relevant authorities, and worked closely with affected clients to ensure they were compensated for their losses.”
