by Howard Haykin

What was he thinking?

From September 2011 to July 2012, under the ‘less than watchful’ eyes of a branch manager ("BOM") and his delegatee, two "rogue brokers" in the Morgan Stanley Palm Harbor, FL office engaged in excessive and unsuitable trading and used discretion without proper authorization in the accounts of a high net worth customer.

The brokers took advantage of the rapidly failing health of this customer, who had been a sophisticated businessman. By September 2011, he had begun to show significant signs of dementia, along with impaired learning and memory abilities. By July 2012, the customer was declared legally incompetent after a Florida court determined he was in a near constant state of confusion and impaired judgment due to total incapacity resulting from dementia and/or Alzheimer's disease. One month later, in August 2012, the customer died.

The brokers used discretion (without proper authorization) to trade excessively and unsuitably in 6 of the customer’s accounts, …

• placing well over 2,000 trades in the 6 accounts in a wide assortment of complex corporate and municipal bonds;
• in many instances, exercising discretion even though none of the accounts were approved for discretionary trading by the Firm;
• in many instances, moving in and out of positions in the same bond in a matter of a few weeks or months;
• generating more than $9 million in commissions during the relevant period.

BRANCH MANAGER’S FAILURE TO SUPERVISE.    First, the BOM and his delegatee failed to identify excessive and unsuitable trading activity in the customer’s accounts, even though the Actimize Trading Activity Reports identified the exceptional nature of this activity and the BOM met regularly with the customer – individually and alongside the 2 rogue brokers.

For example …

• Even though the issue of high cost-to-equity and losses in the accounts generated 10 Actimize Reports, the branch employee assigned by the BOM to review the reports opted not to contact the customer, but instead simply noted in the file that the BOM was in regular contact with the customer.
• The BOM did not detect or investigate when the primary account objective for all accounts was changed from “income” to “speculation” – even though Morgan Stanley's account monitoring systems forwarded an electronic notification to the branch manager whenever client account objectives were changed.

Second, the BOM failed to detect (or act upon) the frequent use of discretion in the customer’s accounts, even though he was well aware of the customer’s deteriorating health and knew that there were times he was incapacitated.

• The BOM never questioned the high frequency of extremely complex bond trading in the accounts at a time when the customer exhibited obvious mental decline.
• The BOM did not detect that hundreds of trades were placed at times that the customer was incapacitated by hospital stays, mental evaluations and surgical procedures.

FINANCIALISH TAKE AWAYS.    In settling the FINRA charges, the branch manager was barred from serving in any principal capacity and ordered to pay a $75K fine. Morgan Stanley also terminated its association with the branch manager.

ADMITTEDLY TOUGH SANCTIONS FOR AN INDIVIDUAL WHO HAD NO PRIOR DISCIPLINARY DISCLOSURES THROUGHOUT HIS 29-YEAR CAREER. HOWEVER, THE SANCTIONS WERE COULD HAVE BEEN WORSE, IN VIEW OF THE GROSS NATURE OF HIS FAILED SUPERVISION - AND THE HARM DONE TO THE CUSTOMER.

This case was reported in FINRA Disciplinary Actions for August 2018.

For details the case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2016049321301.