Morgan Stanley Smith Barney to pay $15M penalty to settle SEC charges

Morgan Stanley Smith Barney will pay a $15 million penalty as part of a settlement with the Securities and Exchange Commission related to four financial advisers who stole millions of dollars of advisory clients’ and brokerage customers’ funds.

The settlement announced late Monday is also related to the firm’s failure to adopt policies and procedures designed to prevent and detect such theft.

The SEC order said that MSSB failed to adopt and implement policies and procedures reasonably designed to prevent its financial advisers from using two forms of unauthorized third-party disbursements, Automated Clearing House payments and certain patterns of cash wire transfers, to misappropriate funds from customer accounts. The order said the financial advisers, located in Texas and California, made hundreds of unauthorized transfers from customers’ or clients’ accounts to themselves or for their own benefit.

Morgan Stanley formed a venture with Citigroup’s Smith Barney in 2009 and purchased the business outright in 2013.

The SEC said that until at least December 2022, MSSB did not have a policy or procedure to screen externally initiated ACH payment instructions to detect instances in which one of its financial advisers assigned to the account bore the same name as the beneficiary listed in the ACH payment instructions. As a result the firm didn’t detect hundreds of unauthorized ACH transfers between May 2015 and July 2022 from its customers’ or clients’ accounts.

“Safeguarding investor assets is a fundamental duty of every financial services firm,” Sanjay Wadhwa, acting director of the SEC’s Division of Enforcement, said in a statement. “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 advisers’ victims and retaining a compliance consultant to conduct a comprehensive review of the relevant policies and procedures.”

Aside from the $15 million penalty, MSSB, which did not admit or deny the SEC’s findings, has consented to a cease-and-desist order, a censure and certain undertakings that include having a compliance consultant review all forms of third-party cash disbursements from customer and client accounts.

“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,” a Morgan Stanley spokesperson said in an emailed statement. “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.”