Massachusetts charges Morgan Stanley over unethical sales contest

The firm allegedly conducted an unethical, high-pressure, sales contest among its financial advisers to encourage clients to borrow money against their brokerage accounts

Oct 3, 2016 @ 12:28 pm

By Mark Schoeff Jr.

Massachusetts has charged Morgan Stanley Smith Barney with conducting an unethical, high-pressure, sales contest among its financial advisers to encourage clients to borrow money against their brokerage accounts.

From January 2014 until April 2015, the firm ran two different contests involving 30 advisers in Massachusetts and Rhode Island. The goal was to persuade customers to take out securities-based loans in which they borrowed against the value of the securities in their portfolios with the securities serving as collateral.

Advisers could earn $1,000 for 10 loans, $3,000 for 20 loans and $5,000 for 30 loans. The contest, which was closely monitored by Morgan Stanley management, generated $24 million in new loans, according to the complaint. The contest was run despite an internal Morgan Stanley prohibition on such initiatives.

Massachusetts Secretary of the Commonwealth William Galvin said that Morgan Stanley advisers violated their fiduciary duty to their clients by recommending that they take on debt.

“The complaint lays bare the culture at Morgan Stanley that bred the high-pressure effort to cross sell banking products to its brokerage customers without regard for the fiduciary duty owed to the investor,” Mr. Galvin said in a statement. “This contest was relatively local, but the aggressive push to cross sell was company-wide.”

Massachusetts is seeking a censure, cease and desist, “equitable relief” for customers who took out the loans and an administrative fine. The state did not indicate how big the equitable relief or fine would be. Those levels will have to be “determined by the process,” said Brian McNiff, a spokesman for Mr. Galvin.

Morgan Stanley will fight the charges.

“The complaint is without merit, and Morgan Stanley intends to defend itself vigorously,” Morgan Stanley spokeswoman Christine Jockle said in a statement. “The securities-based loan accounts were opened only after discussing the product with each client and obtaining their affirmative consent. These accounts are valuable to clients, providing access to low-cost liquidity whenever they choose to access it. Importantly, clients pay no fee to open a securities-based account. They are charged only if they choose to borrow money.”

In going after Morgan Stanley, Mr. Galvin made reference to Wells Fargo, which has been the subject of two heated congressional hearings over the past two weeks related to a cross selling program for retail banking customers that resulted in a $185 million fine from regulators and the firing of 5,300 Wells Fargo employees.

“Morgan Stanley has stated publicly that [cross selling] was extremely limited – this defense has not worked for Wells Fargo and does not work for Morgan Stanley,” Mr. Galvin said.

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