The Securities and Exchange Commission (SEC) has been busy protecting investors this summer and has brought charges against some larger investment firms, including Morgan Stanley Smith Barney and Merrill Lynch.
Morgan Stanley Smith Barney (MSSB) was charged by the SEC with failing to detect or prevent misappropriation of client funds.
On July 29, MSSB, without admitting or denying the findings, agreed to pay a $3.6 million penalty and to accept certain undertakings for its failure.1 MSSB’s insufficient policies and procedures were brought to light in connection with an SEC filing against one of its advisory representatives, Barry F. Connell, who worked out of MSSB New Jersey office. The SEC alleged in its February 2017 complaint that Connell conducted more than 100 unauthorized transactions by using falsified authorization forms misrepresenting that he received verbal requests for the clients.2 The filing alleged that Connell misused or misappropriated approximately $7 million out of four advisory clients’ accounts, over the period of nearly a year, which he used to rent a home in suburban Las Vegas and to pay for other items such as a country club membership and private jet service. In addition to the SEC filing, Connell is also facing criminal charges for his actions. “Investment advisers must view the safeguarding of client assets from misappropriation or misuse by their personnel as a critical aspect of investor protection,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office. “… Morgan Stanley fell short of its obligations in this regard.”3
Merrill Lynch, Pierce, Fenner & Smith was charge on June 19 with misleading customers about how their orders were handled. Merrill Lynch was censured by the SEC and agreed to settle the charges, admit wrongdoing, and pay a $42 million penalty4 in this case which involved Merrill Lynch falsely telling customers that it had executed orders when it had used other broker-dealers, including proprietary trading firms and wholesale market makers. The company then engaged in a practice it called “masking,” reprogramming their systems to falsely report execution venues, altering records and reports, and providing misleading responses to customer inquiries. “Institutional traders often make careful choices about how and where their orders are sent out of a concern for information leakage,” said Joseph Sansone, Chief of the SEC’s Enforcement Division’s Market Abuse Unit.5 “Because of masking, customers who had instructed Merrill Lynch not to route their orders to third-party broker-dealers did not know that Merrill Lynch had disregarded their instructions.”
Merrill Lynch admitted to the SEC that it actually took steps to ensure customers did not learn about this misconduct.
While investors generally can assume that large investment firms have safeguards in place to protect their investments, transactions and sensitive information, these SEC filings affirm once again that investors have to remain diligent. Investors should always review statements and other documentation, ask questions when they have concerns or do not understand the information provided, continually monitor their investments and contact the SEC if they suspect fraud or misconduct by their investment advisor.
If you believe you have been a victim of securities or investment fraud or have questions about your broker’s management of your account, please contact our Michigan Securities Law Firm today. We have helped countless individuals recover from investment losses. Call 313-334-7767 today for your free case evaluation.
1, 3 SEC Charges Morgan Stanley in Connection with Failure to Detect or Prevent Misappropriation of Client Funds, SEC, June 29, 2018
2 SEC Charges Financial Adviser with Stealing from Client Accounts, SEC, February 3, 2017
4,5 Merrill Lynch Admits to Misleading Customers about Trading Venues, SEC, June 19, 2018