As part of a settlement with the Securities and Exchange Commission, Morgan Stanley Smith Barney will pay a $15 million penalty for the theft of millions of dollars from brokerage and advising clients.
The firm’s inability to implement policies and procedures intended to prevent and identify such theft is another factor in the settlement that was disclosed late Monday.
According to the SEC order, MSSB failed to adopt and put into place policies and procedures that were reasonably intended to stop its financial advisers from stealing money from customer accounts through two types of unauthorized third-party disbursements: Automated Clearing House payments and specific cash wire transfer patterns. According to the order, hundreds of illicit transfers from clients’ or customers’ accounts to the financial advisers’ personal accounts, either in Texas or California, were conducted for their own gain.
In 2009, Morgan Stanley partnered with Smith Barney of Citigroup to form a venture, then in 2013, they acquired the company altogether.
In order to identify situations where one of its financial advisers assigned to the account had the same name as the beneficiary listed in the ACH payment instructions, the SEC stated that MSSB lacked a policy or procedure to screen externally initiated ACH payment instructions until at least December 2022. Consequently, the company failed to identify hundreds of fraudulent ACH transfers from its clients’ or customers’ accounts between May 2015 and July 2022.
Sanjay Wadhwa, acting head of the SEC’s Division of Enforcement, stated in a statement that protecting investor assets is a basic responsibility of all financial services companies. The firm’s numerous self-reports to the Commission staff, its extensive collaboration with them, and its corrective actions—such as paying the victims of the financial advisers and hiring a compliance consultant to perform a thorough examination of the pertinent policies and procedures—are also taken into consideration in today’s resolution.
In addition to the $15 million fine, the MSSB agreed to a cease-and-desist order, a censure, and specific undertakings, such as having a compliance consultant examine all third-party cash withdrawals from client and customer accounts. The SEC’s allegations were not acknowledged or denied by the MSSB.
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