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Enforcement Roundup: FINRA Fines Morgan Stanley for Failures to Supervise Advisor Program

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In recent enforcement actions, FINRA censured Morgan Stanley Smith Barney and fined it $1 million for failures to supervise its Former Financial Advisor Program, and censured and fined Traditional Asiel Securities on failures to close out fail-to-deliver positions.

In addition, the Secretary of the Commonwealth of Massachusetts charged a Newton couple with fraud in a real estate investment scheme.

FINRA Fines Morgan Stanley Smith Barney $1 Million

FINRA censured Morgan Stanley Smith Barney and fined it $1 million on failures to supervise its Former Financial Advisor Program.

According to the agency, the firm did not have adequate written supervisory procedures to supervise the payment of continuing commissions to retired representatives. It also failed to find extensive noncompliance with requirements to create and maintain documentation.

While the firm paid more than $100 million in commissions to retired registered representatives, because of its documentation failures, it had no way to determine whether the retired representatives were acting as unregistered brokers and whether its payments were in compliance.

The firm neither admitted nor denied the sanctions.

Couple Charged With Fraud by Massachusetts

Eileen and Lawrence Schwartz of Newton, Massachusetts, and the investment advisory firm E. S. Schwartz & Co. (ESSC) were charged by William Galvin, secretary of the commonwealth, with fraudulent activities, dishonest and unethical business practices in offering investors real estate ventures they created.

Among the ventures were three that invested in Miami condominiums, bringing in $695,000 from ESSC clients. The Schwartzes, who had no experience in Miami real estate investing, chose not to let clients know that.

Other total-loss ventures were two that were supposed to deal in large apartment complexes, when the only experience the Schwartzes had was in buying and renting single-family and multifamily homes. The $3.2 million they brought in for those, which included about $600,000 from ESSC clients, went up in smoke.

According to the complaint, “The Schwartzes used their ESSC client base as an important source of funding for these ventures. All told, 19 ESSC investment advisory clients have lost approximately $2 million. Total losses to all investors—including at least 25 investors who are not clients of ESSC—are approximately $5.4 million.”

Not only did the Schwartzes not disclose their lack of experience in the projects they undertook with other people’s money, they neglected to tell their investors that the most they might gain, should these ventures actually succeed, was 40% of profits. Meanwhile, those investors were on the hook for 100% of the risk.

The complaint seeks revocation of the registrations of the three respondents and a permanent bar from future registration with the Securities Division. It asks for an accounting and recission to investors.

FINRA Fines, Censures Traditional Asiel on Fail-to-Deliver Failures

Traditional Asiel Securities Inc. was censured by FINRA and fined $150,000 for failures to close out fail-to-deliver positions. According to the agency, the firm accepted a short sale order or effected a short sale position for its own account without first borrowing the security or arranging to do so.

It also had a fail-to-deliver position at a registered clearing agency in such security that had not been closed out in accordance with Regulation SHO.

In addition, there were supervisory failures regarding compliance with Regulation SHO and regarding documentation to prove supervisory reviews with regard to the regulation.

The firm neither admitted nor denied the findings.


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