The Securities and Exchange Commission announced that Morgan Stanley Smith Barney (MSSB) has agreed to pay a $3.6 million penalty for its failure to protect against its personnel misusing or misappropriating funds from client accounts.
The SEC finds that MSSB failed to have reasonably designed policies and procedures in place to prevent its advisory representatives from misusing or misappropriating funds from client accounts.
(MSSB became Morgan Stanley Wealth Management in 2012 but still uses Morgan Stanley Smith Barney as its broker-dealer designation.)
According to the SEC’s order, MSSB’s insufficient policies and procedures contributed to its failure to detect or prevent one of its advisory representatives, Barry Connell, from misusing or misappropriating approximately $7 million out of four advisory clients’ accounts in approximately 110 unauthorized transactions occurring over a period of nearly a year. Connell misappropriated over $5 million from the client accounts to fund his lavish lifestyle, the SEC says.
“Investment advisors must view the safeguarding of client assets from misappropriation or misuse by their personnel as a critical aspect of investor protection,” Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office, said in a statement. “Today’s order finds that Morgan Stanley fell short of its obligations in this regard.”
According to the SEC, from at least 2009 to the present, MSSB permitted its advisory representatives to initiate third-party disbursements from client accounts of outgoing wire transfers and journals of up to $100,000 per day per account based on the representatives’ proof on an internal electronic form that they had received a verbal request from the client by phone or in-person and providing certain details about the request.
Although MSSB’s policies provided for certain reviews of disbursement requests, the reviews were not reasonably designed to detect or prevent such potential misconduct, the SEC finds.
Without admitting or denying the findings, MSSB consented to the SEC’s order, which includes a $3.6 million penalty, a censure, a cease-and-desist order, and undertakings related to the firm’s policies and procedures. Morgan Stanley previously repaid the four advisory clients in full plus interest.
The SEC previously filed fraud charges against Barry Connell, who was also criminally charged by the U.S. Attorney’s Office for the Southern District of New York. Both sets of charges as to Connell remain pending.
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