Barry F. Connell a Morgan Stanley stockbroker from Ridgewood, New Jersey “allegedly” stole or misappropriated approximately $7 million from several his clients in more than 110 transactions. Connell was charged by the SEC in February 2017, has been criminally charged by the U.S. Attorney’s Office for the Southern District of New York. These charges remain pending.
However, today, Morgan Stanley agreed to pay a $3.6 million fine and to institute various remedial measures, by the United States Securities & Exchange Commission, because it failed to design and implement a system of supervision, policies and procedures to prevent its stockbrokers and investment advisors from stealing their customers’ money.
As the SEC Order states: “As their investment adviser, Morgan Stanley and Connell owed these clients an affirmative fiduciary duty of utmost good faith and MSSB was required under the compliance rule to, among other things, have policies and procedures reasonably designed to safeguard their assets from conversion or other inappropriate use by Connell.”
While brokers who steal money are often judgment proof or on their way to jail, the brokerage firms who employ them are liable for the acts of their registered representatives particularly, as was the case here, the firm fails to supervise or to design and implement a system of supervision to prevent stockbroker theft.
FINRA Conduct Rule 3012 regarding the establishment of a Supervisory Control System specifically requires all firms: “to establish, maintain and enforce written supervisory control policies and procedures that, among other things, include procedures that are reasonably designed to review and monitor the transmittal of funds (e.g., wires or checks) or securities.”
In addition, FINRA Rule 2090, the “Know Your Customer” Rule provides that:
Every member shall use reasonable diligence, in regard to the opening and maintenance of every account, to know (and retain) the essential facts concerning every customer and concerning the authority of each person acting on behalf of such customer. (emphasis added).
Essential Facts. For purposes of this Rule, facts essential to “knowing the customer” are those required to (a) effectively service the customer’s account, (b) act in accordance with any special handling instructions for the account, (c) understand the authority of each person acting on behalf of the customer, and (d) comply with applicable laws, regulations, and rules.
FINRA also suggests that a firm’s policies and procedures should include procedures that are reasonably designed to, among other things: verify that any third party who purports to be acting on behalf of a customer, including any family member, third-party investment advisor or money manager, has been authorized by the customer to take the action in question,” and that “this typically, requires firms to verify that a valid power of attorney has been executed by the customer and that actions taken by the third party are within the scope of the authority conveyed.” Regulatory Notice 09-64 at 3 (Nov. 2009).
The case against Morgan Stanley is quite interesting.
Since at least 2009 to the present, Morgan Stanley permitted its financial advisors to initiate payments to third-parties, disbursements, including wires and journals, from client accounts of up to $100,000 per day per account based upon the financial advisors “attestation” of having received a verbal request from the client.
All that was required is for sales assistant, never having spoken to the client, to complete an electronic form with the transfer details.
Morgan Stanley’s Service Review Unit would review the electronic forms, but al it reviewed was whether the forms were complete.
According to the SEC action, Morgan Stanely did not require a client signature or letter of authorization, Morgan Stanley never required a call back to the client pr have policies or procedures to conduct such a call on a sample basis, and did not record calls.
As a result, financial advisors could misappropriate client funds by making false attestations.
Here, Connell is alleged to have stolen $7 million in 110 transactions.
Perhaps not surprisingly, Morgan Stanley also entered into settlement agreements with the defrauded clients in which it fully repaid the clients with interest.
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