The Massachusetts Securities Division fined Morgan Stanley Smith Barney $1 million for compensating financial advisors to encourage clients to open securities-based lending accounts at an affiliated private bank.
The division’s order asserts that the firm violated its own policies against sales contests and failed to quickly stop the program after compliance raised objections.
On April 7, Morgan Stanley settled the case without admitting or denying the facts.
(MSSB Became Morgan Stanley Wealth Management in 2012 but still uses Morgan Stanley Smith Barney as its broker-dealer designation.)
The Massachusetts Securities Division finds that between Sept. 1, 2013 and April 30, 2015, Morgan Stanley Smith Barney placed a particular emphasis on securities-based lending, including a form of securities-based loan known as a portfolio loan account. These accounts allow Morgan Stanley customers to borrow money against the value of securities in their investment accounts, with customers’ securities serving as collateral for the loan.
According to the order, Morgan Stanley’s focus on securities-based lending “quickly paid dividends.”
In 2013, 9% of Morgan Stanley’s Wealth Management clients had a securities-based loan at Morgan Stanley. By 2014, that percentage was 12%. And, by the third quarter of 2015, 15% had a securities-based loan at Morgan Stanley.
According to the order, Morgan Stanley hired private bankers to work with financial advisors to introduce, among other things, securities-based lending capability to clients. One private banker described it as a “process-based sales approach vs. a need-based approach to securities-based lending.”
According to the order, Morgan Stanley compensated and incentivized financial advisors to cross-sell. Morgan Stanley management also had knowledge of the incentive program but failed to terminate the program immediately even after compliance discovered the program, the order says.
The Massachusetts Securities Division charges supervisory violations and failure to ensure “commercial honor and just and equitable principles of trade.”
“Morgan Stanley is pleased to resolve this matter with the Massachusetts Securities Division. The order contains no finding of fraudulent activity or that any client took a loan that was unsuitable or unauthorized,” the company said in a statement.
SEC Charges Two Lawyers and a Paralegal in a Stock Manipulation Scheme
The Securities and Exchange Commission filed fraud charges against a New York City-based securities lawyer for orchestrating the takeover of two publicly traded shell companies and rigging them and their securities for use in market manipulation schemes for his personal profit. Another lawyer and a paralegal are also charged for their roles in furthering the schemes.
According to the SEC’s complaint, filed in federal court in New York, Mustafa David Sayid used his position as a securities lawyer to gain control of two microcap companies, Nouveau Holdings Ltd. and Striper Energy Inc.
According to the complaint, from 2012 to 2015, Sayid caused the two companies to issue convertible debt to him that could be redeemed for company stock for purported legal fees owed to him. The complaint charges that Sayid profited by selling the debt to a pair of stock manipulators, setting them up to dump large blocks of the company’s stock in the over-the-counter markets. Sayid allegedly made multiple false statements to investors and other third parties, while he coordinated with the pump-and-dump operators who were responsible for pumping each company’s share price and then dumping the stock.
According to the SEC’s complaint, Sayid hired Norman Reynolds, a securities lawyer practicing in Houston, Texas, to issue false opinion letters to persuade Nouveau’s transfer agent to remove restrictive legends from millions of shares of Nouveau, which were then sold in a dump of Nouveau’s stock. The SEC alleges that Reynolds based his legal opinion on fabricated documentation from Sayid while negotiating for payment from the proceeds of the Nouveau pump and dump.
The SEC alleges that Sayid hid his control of Nouveau and Striper by installing officers and directors at the companies who would follow his direction, including his paralegal, Kevin Jasper of New York City. Jasper aided Sayid’s market manipulation schemes by signing false documents at Sayid’s direction.
Defendant in SEC Enforcement Action Indicted for Orchestrating $30 Million Stock Manipulation Scheme
Ryan Gilbertson, a Minnesota man previously accused by the SEC of orchestrating an elaborate scheme to siphon millions of dollars from Dakota Plains Holdings Inc., was indicted on 13 counts of wire fraud. Also charged in the indictment were Douglas Hoskins and Nick Shermeta.
The charges in the indictment arise from the same conduct alleged by the SEC. According to the SEC’s complaint, filed in federal court in Minnesota on Oct. 31, Gilbertson and another company co-founder, installed their fathers as figurehead executives in order to secretly wield control of the company and issue millions of shares of stock to themselves, family and friends. They allegedly later hired one of their friends as CEO. They allegedly caused the company to enter into an agreement to borrow money from them under generous terms that included extra bonus payments to Gilbertson and other lenders, based on the price of Dakota Plains stock after 20 days of trading following a reverse merger into a company with publicly traded shares.
According to the SEC’s complaint, Gilbertson enlisted friends and associates including Douglas Hoskins to choreograph extensive sales and purchases of Dakota Plains stock and cause the price to skyrocket from 30 cents to more than $12 per share during that 20-day period. The allegedly inflated stock price obligated Dakota Plains to make bonus payments of more than $32.8 million to Gilbertson and others. After allegedly meeting his target to receive the bonus payments, Gilbertson ceased his alleged manipulation efforts. The stock price then allegedly steadily declined to pennies per share and the company was eventually delisted.
Also named in the indictment was Minnesota-based stockbroker Nicholas Shermeta. Shermeta consented to an SEC order, entered on Oct. 31, finding that he willfully violated the Securities Exchange Act of 1934. According to the SEC’s order, he solicited investors for Dakota Plains and recommended the stock to his clients at the registered brokerage firm where he worked, but improperly brokered the sales through his unregistered firm rather than through his employer. Without admitting or denying the findings, Shermeta agreed to the entry of the SEC’s order requiring him to pay $75,000 in disgorgement, $11,000 in prejudgment interest and a $50,000 penalty. The SEC’s order also imposed industry bars on Shermeta with a right to apply for re-entry after three years.
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