Morgan Stanley Smith Barney fined $15M by SEC for inadequate supervision

A lack of effective oversight of financial advisors that enabled millions of dollars of client funds to be stolen over several years has landed a major financial institution with a $15 million penalty from the SEC to settle charges.

Morgan Stanley Smith Barney was charged Monday with failing to reasonably supervise four of its advisors - Michael Carter, Chingyuan “Gary” Chang, Douglas McKelvey, and Jesus Rodriguez - who misappropriated almost $10 million in client funds through unauthorized wire transfers and automated clearing house payments.

Although the timelines differ between the advisors, the earliest alleged incident was in 2007 and included transfers to pay an advisor’s personal credit card bill and other personal expenses.

The SEC order states that MSSB failed to implement policies designed to prevent third-party ACH payments and certain wire transfers being used to misappropriate client advisory and brokerage accounts. This led to the advisors being able to make hundreds of transactions for their own benefits, undetected. The agency says that this was the case at least until December 2022.

Without admitting or denying the SEC’s findings, MSSB consented to a cease-and-desist order, a censure, certain undertakings that include having a compliance consultant review all forms of third-party cash disbursements from customer and client accounts, and to the $15 million penalty. The firm has already settled with affected customers who were reimbursed for their financial losses.

“Safeguarding investor assets is a fundamental duty of every financial services firm, but MSSB’s supervisory and compliance policy failures let its financial advisors make hundreds of unauthorized transfers from their customer and client accounts and put many other such accounts at significant risk of harm,” said Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement. “However, today’s resolution also takes into account the firm’s several self-reports to, and substantial cooperation with, the Commission staff and its remedial efforts, including compensating the financial advisors’ victims and retaining a compliance consultant to conduct a comprehensive review of the relevant policies and procedures.”

A spokesperson for Morgan Stanley told InvestmentNews: “These were isolated events, each of which occurred several years ago. We take these incidents very seriously and have since enhanced our control framework, working in conjunction with an outside expert. We pride ourselves on putting clients first, and in each instance, when we learned of the wrongdoing, we conducted an internal investigation, terminated the wrongdoers, reported them to the proper authorities and worked with affected clients to compensate them for any harm.”