Morgan Stanley Smith Barney to Pay $15M SEC Penalty for Failure to Prevent Financial Advisors’ Theft of Investor Funds
Financial services firms have a duty and are required by U.S. Securities and Exchange Commission (SEC) rules to have supervisory and compliance policies that safeguard investors from fraud. When investors become victims of fraud, and investment advisors are responsible for the theft of investor funds, it is particularly disturbing. On December 9, 2024, the SEC announced that Morgan Stanley Smith Barney agreed to settle charges that it failed to “reasonably supervise four investment adviser and registered representatives who stole millions of dollars of advisory clients’ and brokerage customers’ funds and for failing to adopt policies and procedures reasonably designed to prevent and detect such theft.”1
The four investment advisors/registered representatives initiated hundreds of third-party disbursements which included unauthorized wire transfers and Automated Clearing House (ACH) electronic funds transfers from their customers’ or clients’ accounts between May 2015 and July 2022. They misappropriated millions of dollars in funds, including $1.7 million in ACH payments, which paid for the advisors/representatives’ credit card bills or other personal expenses of the advisors/representatives.2
Until about December 2022, Morgan Stanley Smith Barney (MSSB) did not have a policy or procedure that screened ACH payments to determine if the beneficiary listed on the ACH payment instructions was the same as the MSSB financial advisor who was assigned to that particular account. MSSB financial advisors had access to all the data needed to initiate an ACH payment including the name of an account holder, the financial institution routing numbers and the investors’ account numbers. With no MSSB screening, the advisors’ fraud went undetected for years.
MSSB neither admitted nor denied the SEC’s findings in this order. They did consent to a cease-and-desist order, a censure, and a review of all forms of third-party cash disbursements from customer and client account to be conducted by a compliance consultant. They also agreed to pay a $15 million SEC imposed penalty. MSSB had previously compensated affected customers for losses incurred.
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1 Press Release: SEC Charges Morgan Stanley Smith Barney for Policy Deficiencies that Resulted in Failure to Prevent and Detect its Financial Advisors’ Theft of Investor Funds, 12/9/2024
Link: https://www.sec.gov/newsroom/press-releases/2024-193
2 Administrative Proceeding File No. 3-22339 in the Matter of Morgan Stanley Smith Barney LLC, 12/9/2024
Link: https://www.sec.gov/files/litigation/admin/2024/34-101842.pdf