Barry F. Connell, formerly of the Ridgewood office of Morgan Stanley, Inc., formerly known as Morgan Stanley Smith Barney, Inc., was charged by the United States Securities & Exchange Commission for the Connell, for the violation of Sections 206(1) and 206(2) of the Advisers Act, in that while acting as an investment adviser, by use of the means of and instrumentalities of interstate commerce or the mails, directly or indirectly: (a) employed devices, schemes, or artifices to defraud clients; and (b) engaged in transactions, practices, or courses of business which operate as a fraud or deceit upon clients, in connection with the alleged theft of $5 million from his customers.
According to the No. 1:17-cv-00831, over the course of approximately 11 months, beginning in June 2015, Connell effected than 100 unauthorized transactions in the form of transfers in the accounts of at least five of his customers, and then transferred approximately $5 million to unauthorized third parties, via wire transfers and checks.
Connell’s scheme was carried our using falsified authorization forms, fraudulently stating that he had received verbal requests from the clients for third party wires, checks, and journals between his customer accounts. Connell also used blank customer checks to make payments to himself.
Connell directed the unauthorized third-party payments to individuals and entities to cover his personal expenses and fund his lavish lifestyle, including, among other things, for a rental home lease in Henderson, Nevada, a country club membership, and private jet service.
Morgan Stanley, Inc. which has a duty to “know its customers,” and a special duty to supervise Connell, particularly when apparently forged customer checks are being made payable to its own broker, claims to have discovered Connell’s misconduct some time in early November 2016. Supposedly a week after Morgan Stanley began its investigation, Connell was discharged or terminated by Morgan Stanley for cause on November 11, 2016, based upon “[a]llegations regarding unauthorized withdrawals and transfers of funds from client’s household accounts to third-party payees, which appear to be for the benefit of its former registered representative.”
Interestingly enough, also just a week after Morgan Stanley began its “investigation,” Connell’s branch manager, Jeffrey Crystal, was placed upon “indefinite administrative leave.” Jeffrey Crystal manages approximately eighty brokers at the Ridgewood, New Jersey and the Paramus, New Jersey Morgan Stanley offices. Supposedly, Crystal was concerned, or at least became aware of potential problems with Connell sometime in the Summer of 2016, after Connell’s unexplained long absences from the office. It also appears that Crystal, or at least someone else at Morgan Stanley had actual knowledge that Connell has secured and in fact used an unlimited power of attorney that Connell had obtained from an “elderly client.”
Morgan Stanley has a duty 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, customers and registered representatives (including the hand-delivery of checks).”
FINRA Conduct Rule 2090(a) also requires Morgan Stanley to ascertain the facts concerning the authority of each person acting on behalf of such customer.
These Rules are not new. 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:
- from customer accounts to third-party accounts (i.e., a transmittal that would result in a change of beneficial ownership);
- from customer accounts to outside entities (e.g., banks, investment companies);
- from customer accounts to locations other than a customer’s primary residence (e.g., post office box, “in care of” accounts, alternate address); and
- between customers and registered representatives (including the hand-delivery of checks).
NASD Rule 3012 (Supervisory Control System) and Incorporated NYSE Rule 401, See also, Regulatory Notice 09-64 (Nov. 2009)(“FINRA firms must have and enforce policies and procedures governing the withdrawal or transmittal of funds or assets from customer accounts, including instructions froman investment adviser or other third party purporting to act on behalf of the customer”); FINRA Regulatory Notice 12-05 (Jan. 2012)(“firms must have adequate policies and procedures to review and monitor all disbursements it makes from customers’ accounts, including but not limited to third-party accounts, outside entities or an address other than the customer’s primary address”); FINRA Department of Enforcement v. Ameriprise, Letter of Acceptance Waiver & Consent, No. 2010-02515730(March 1, 2013)(Ameriprise fined $750,000 for Failing to Supervise and have reasonable supervisory systems in place to monitor wire transfer requests and the transmittal of customer funds to third-party accounts).
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).
Although not disclosed in his Morgan Stanley regulatory records, Court records reveal that Connell had previously sought protection under the federal bankruptcy laws.
It is uncertain whether Morgan Stanley will make or offer restitution to Connell’s customers without resort to litigation. Supposedly, the Federal Bureau of Investigation is involved and the authorities, including the New Jersey Attorney General’s office, have been unable to locate Connell.
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