Morgan Stanley to pay $7 million in penalties

Morgan Stanley & Co. will pay more than $7 million to resolve allegations of misconduct by two former brokers accused of misleading Rochester, N.Y., area employees of Eastman Kodak Co. and Xerox Corp. to take early retirement and invest retirement assets with them.

Morgan Stanley & Co. will pay more than $7 million to resolve allegations of misconduct by two former brokers accused of misleading Rochester, N.Y., area employees of Eastman Kodak Co. and Xerox Corp. to take early retirement and invest retirement assets with them.

The Financial Industry Regulatory Authority, an independent regulator of U.S. securities firms, said Wednesday that Morgan Stanley will pay a $3 million fine and more than $4.2 million in restitution to 90 Rochester area residents who took early retirement.

The settlement resolves allegations that Morgan Stanley failed to adequately supervise two of its former brokers, Michael J. Kazacos and David M. Isabella, in its Rochester branch office.

A FINRA investigation found Kazacos and Isabella broke several industry rules in handling rollovers of employee Individual Retirement Accounts, and made unrealistic predictions that Kodak and Xerox employees would earn returns of 10 percent each year in retirement if they invested with Morgan Stanley. FINRA also alleged that Ira S. Miller, the manager of Morgan Stanley’s Rochester branch, failed to supervise Kazacos and Isabella.

During the period the misconduct allegedly occurred, from 1998 through 2003, Kazacos and Isabella generated about $15.4 million in gross commissions from soliciting investments with Morgan Stanley, FINRA said.

At least 184 customers suffered financial hardships as a result of the misconduct, FINRA said. The regulator said Morgan Stanley has previously settled with 101 customers, besides the 90 who are due restitution as a result of the settlement.

FINRA reached settlements with Kazacos and Miller, who, along with Morgan Stanley, neither admitted nor denied the findings under their agreements. Kazacos is permanently barred from the securities industry, FINRA said, and Miller was fined $50,000. Miller also was suspended from “acting in a principal capacity for one year,” FINRA said.

Morgan Stanley spokeswoman Christy Pollak said the company cooperated with the investigation and is pleased to settle the matter. Pollak said Morgan Stanley has strengthened its supervisory policies and procedures since the alleged misconduct occurred. Kazacos and Isabella are no longer Morgan Stanley employees, Pollak said.

Isabella has not settled, and was named in a disciplinary complaint that FINRA filed Wednesday. That complaint will be heard before a FINRA hearing panel. Andrew Sidman, an attorney for Isabella, declined to comment, saying he and his client were reviewing the complaint.

A lawyer for Kazacos, David Gourevitch, said his client retired two years ago and “is pleased to put this behind him.”

Miller’s lawyer, Howard Elisofon, said his client also was pleased to resolve the investigation and “looks forward to serving Rochester-area clients in his role as a financial advisor.”