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Regulatory Sanctions

Morgan Stanley Fined $3.6Mn – Failed to Supervise Financial Advisor

July 11, 2018

by Howard  Haykin


Morgan Stanley Smith Barney (MSSB) agreed to pay a $3.6Mn fine to settle SEC charges that it failed to protect against its personnel misusing or misappropriating funds from client accounts. Under the agreement, MSSB must also enhance its policies, procedures, systems and controls relating to preventing or detecting conversion of client advisory funds by MSSB personnel through all forms of third-party cash disbursements – and then certify those changes to the SEC.


The SEC previously filed fraud charges against an MSSB financial advisor, Barry Connell, who was also criminally charged by the U.S. Attorney’s Office for the Southern District of New York.  Both sets of charges remain pending.


SEC FINDINGS.    MSSB has had a long-standing policy of permitting its investment adviser reps and registered reps (“financial advisors” or “FAs”) to initiate third-party disbursements from client accounts of outgoing wire transfers and journals of up to $100,000 per day per account – so long as the FA attests to having received a verbal request from the client by phone or in-person, and providing certain details about the request.


From at least December 2015 until November 2016, one of its FA's, Barry Connell, initiated over $7 million in unauthorized transactions out of the accounts of 4 of his advisory clients - a married couple aged 81 and 77, their adult daughter, and a trust for which the daughter serves as co-trustee.


  • Connell secretly misappropriated funds from the advisory accounts of the daughter and trust by initiating numerous unauthorized third-party wires and checks to individuals and entities to cover his personal expenses and fund his lavish lifestyle.


  • Connell made a series of unauthorized cash journals from the couple’s advisory accounts to augment the existing funds in the daughter’s and trust’s accounts, which he then misappropriated.


  • Specifically, Connell falsely represented to an assistant that the clients had provided verbal instructions to transfer funds and provided the details needed to initiate the transfers to the assistant, who submitted the requests in MSSB’s systems.


  • In total, Connell misused clients’ funds by initiating approximately 110 unauthorized transactions (90 internal electronic forms, and 20 client account checks) totaling $7 million and misappropriated over $5 million through these transactions for his own benefit.


While MSSB policies provided for certain reviews prior to issuing the disbursements, such reviews were not reasonably designed to detect or prevent an FA making false attestations about having received a verbal client request to transfer funds to a third-party for the FA’s benefit. MSSB’s insufficient policies and procedures contributed to its failure to detect or prevent an FA from misappropriating funds from client accounts over a period of nearly a year. MSSB, in fact, did not detect that any of these transactions were unauthorized throughout this timeframe.


FINANCIALISH TAKE AWAY.    Had a representative of the defrauded clients not contacted MSSB to question the transactions in their accounts, who knows when MSSB may have detected the illegal conversions? Once notified, MSSR promptly conducted an internal investigation, terminated Connell, and reported the fraud to the SEC and other law enforcement agencies. As of 4/25/17, MSSB entered into settlement agreements with the defrauded clients in which MSSB fully repaid the clients plus interest.


[For further details, click on ...  SEC ADMINISTRATIVE ORDER.]