Morgan Stanley must pay $15 million for theft by former employees

Morgan Stanley to pay $15 million to settle allegations that its Smith Barney unit failed to prevent four of its former financial advisers stealing millions of dollars from customer accounts The Securities and Exchange Commission announced on Monday.

The broker-dealer did not have an acceptable system in place between 2015 and 2022 to detect when funds were misappropriated through unauthorized clearinghouse automated transfers and bank inquiries, the regulator said. This, the SEC said, violated the Advisers Act’s “suitability rule.”

According to the SEC, Morgan Stanley did not implement a means of verifying the name of the beneficiary of ACH payments until at least December 2022. That allowed three now-former financial advisers to initiate ACH transfers to pay their own credit card bills or otherwise misappropriate funds for their own benefit, the regulator said.

Morgan Stanley also failed until February 2021 to put in place a procedure to detect cases where unrelated clients of one financial adviser transferred money to the same third-party account, the SEC said. The firm “recognized that such activity was a red flag” and installed third-party fraud detection software in 2015, believing the software was designed to detect the pattern, the regulator said. It did not, and Morgan Stanley did not test that variable for the next five years, the SEC said.

“Protecting investors’ assets is a core responsibility of every financial firm, but (Morgan Stanley Smith Barney’s) oversight and compliance policy failures allowed its financial advisors to make hundreds of unauthorized transfers from their client and client accounts and put many other such accounts at significant risk.” harm,” Sanjay Wadhwa, acting director of the SEC’s Division of Enforcement, the statement says.

As part of Monday’s settlement, Morgan Stanley agreed to allow a compliance consultant to audit all forms of cash disbursements by third parties from client accounts. The bank did not admit or deny the allegations, but the SEC noted “several independent reports,” “substantial cooperation” and “remedial efforts, including compensation to victims of financial advisors.”

“We take these incidents very seriously and have since improved our controls by working with an external expert,” a Morgan Stanley spokesman said in a statement seen by Bloomberg and AdvisorHub. “We pride ourselves on putting customers first, and in every case where we have become aware of a breach, we have conducted an internal investigation, taken down the offenders, reported them to the appropriate authorities and worked with affected customers to compensate them for any damages” .

The SEC identified the four former employees as Michael Carter, Jesus Rodriguez, Douglas McKelvey and Qinyuan “Gary” Chang.

Carter, broker of McLean, Va., was condemned to five years in prison in 2021 on charges of bank account fraud and investment adviser fraud for making more than 50 unauthorized transfers from clients totaling $6.15 million to finance out-of-pocket expenses, including country club membership fees .

In January, Rodriguez, who lives in El Paso, Texas, was charged with stealing $3.5 million from customers.

McKelvey, located in Southlake, Texas, pleaded guilty in 2023 to stealing at least $1.5 million from his mother and mother-in-law.

Financial Industry Regulatory Association prohibited Chang in December 2022 on charges that he misappropriated about $58,560 from four clients. Morgan Stanley had fired him a few months earlier for similar allegations.