Oh, the "Wrath of Bogus Journal Entries."  Not to mention failure to implement adequate "segregation of duties" and "supervision of supervisors."  

Morgan Stanley & Co. agreed to settle FINRA charges related to a former employee in the New York Position Services Group who misappropriated some $2.5mn from the firm, institutional firm customers and a firm counterparty.   The individual entered, or caused to be entered, numerous false journal entries ("J/E's") into the firm’s electronic system to transfer and credit money associated with corporate actions.

FINRA found that the employee then entered system requests for checks to be issued to his shell corporation against the suspense and/or fee accounts that he was using to misappropriate funds.  The employee entered some check requests himself, which NYPS employees that reported to him later approved.  Subordinates of the employee entered check requests on his instructions, and the employee also entered check requests using the ID and password of another NYPS employee.  The employee later approved all of the check requests.

Morgan Stanley's Failures.   FINRA found that the firm failed to establish and implement an effective system for following-up on, and reviewing, J/E's, and it lacked adequate procedures for reviewing and approving check requests related to corporate actions.  FINRA further found...

• MS didn't have procedures for reviewing the ex-employee's check requests and J/E's.
• MS failed to properly supervise the ex-employee and failed to detect that he entered, or caused to be entered, false check requests and false J/E's related to corporate actions, which allowed him to misappropriate approximately $2.5mn. 

Morgan Stanley subsequently introduced a new system - the Summary of Manual Journals (SOMJ) - to replace the review of all J/E's and required the review and approval of J/E's that the firm determined to be high priority.  As a control, J/E's remained on the SOMJs until a supervisor reviewed and approved them.  However, ...

• The ex-employee was assigned to review and approve all high-priority J/E's flagged on the SOMJs, including his own. 
• MS assigned some NYPS supervisors - all of whom reported directly to the ex-employee - to review and approve J/E's flagged on SOMJs.  However, nobody was assigned to review high-priority J/E's entered by anyone not on one of those teams, including the ex-employee.
• MS failed to have a system to inform NYPS management if J/E's flagged on the SOMJs were not approved.  FINRA found that the ex-employee made numerous journal entries, some of which were flagged as high-priority.  He approved several of them, but many were not reviewed and were listed on the SOMJs pending approval at the time of his termination. 
• FINRA also found that check requests NYPS personnel entered were required to be approved by another NYPS employee, but the firm didn't require the person approving the check to be a supervisor or have supervisory responsibility.  As a result, NYPS associates approved check requests an NYPS supervisor entered, and entered check requests on a supervisor’s behalf, which the supervisor subsequently approved. 
• MS didn't require any review to determine if the check request was associated with a corporate action and the approver simply ensured that all the required information was included in the check request.

Morgan Stanley will pay a $375K fine.  This is FINRA Case #2009017072302.   [Disciplinary Actions for June 2011]