In addition to the $10 million Morgan Stanley was made to pay to more than several dozens of its customers for the theft of funds stolen by its stockbrokers and investment advisors, on December 9, 2024, as well as agree to certain other “undertakings,” Morgan Stanley has agreed to pay an additional $15 million in fines to the United States Securities & Exchange Commission for the failure to adopt and implement policies and procedures reasonably designed to prevent Morgan Stanley stockbrokers from stealing from their own customers. In the Matter of Morgan Stanley Smith Barney LLC, Administrative Proceeding File No. 3-22339 34-101842 (Dec. 9, 2024).
Morgan Stanley offers its brokerage customers and advisory clients the ability to transfer cash from their Morgan Stanley accounts to outside parties using a variety of methods, including ACH payments. The ACH system is a nationwide payment network through which financial institutions accumulate and send each other electronic cash transfers. The ACH system is commonly used to allow customers of financial institutions to transfer cash for such purposes as online bill payments and money transfers. In simple terms, an externally-initiated ACH payment involves a customer of another financial institution (the “originating financial institution”) initiating payment instructions to request and obtain payment from a particular account at the financial institution receiving the payment instruction (the “receiving financial institution”).
According to the SEC Action, these registered representative violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and/or Sections 206(1) and (2) of the Advisers Act, and Morgan Stanley Smith failed to adopt and implement policies and procedures reasonably designed to prevent and detect this misappropriation for “years.”
According to the SEC Enforcement Action, Morgan Stanley failed to adopt and implement policies and procedures reasonably designed to prevent and detect misappropriation from client and customer accounts by its financial advisors by means of unauthorized transfers and the misappropriation of customer funds by four Morgan Stanley stockbrokers from different regions of the country, Michael Carter (Maryland), Chingyuan “Gary” Chang (California), Douglas McKelvey (Texas), and Jesus Rodriguez (Texas).
In July 2020, The Securities and Exchange Commission, alleged that, from approximately October 2007 through May 2019, Carter misappropriated approximately $6 million from brokerage customers and an elderly investment advisory client while he served as their financial advisor. Of that sum, Carter misappropriated approximately $2.5 million in the last five years. Carter’s victims include people close to him who knew and trusted him through familial ties and friendship. Carter carried out his scheme by falsifying internal forms to effect approximately 60 unauthorized cash wire transfers from the customers’ accounts to his personal bank account at another financial institution. Carter concealed his fraud from the investors by providing them with fake account statements that he fabricated, diverting their real account statements and other correspondence to post office boxes that he controlled or to a false email address that he created, and by making misrepresentations to them concerning their securities investments. Carter used the funds that he misappropriated from the investors to support his lifestyle, which included hundreds of thousands of dollars of credit card bills, thousands of dollars of cash withdrawals, payments for a substantial home mortgage, and a luxury car. SEC v. Michael Barry Carter, No. 20-cv-02112-CCB (D. Md.) (July 20, 2020).
From September 2021 through June 2022, Chang misappropriated approximately $58,560 from four customers and/or clients by initiating unauthorized Automated Clearing House disbursements from their accounts at Morgan Stanley to his personal accounts at two online payment applications. Chang made approximately 40 unauthorized ACH payments from four customer accounts while employed as a registered representative and investment adviser representative in Morgan Stanley’s Cupertino, CA office. In some of the instances, Chang sold securities in the customer accounts shortly before making the fraudulent transfers to himself. As a result of the conduct described herein, Chang willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 206(1) and 206(2) of the Advisers Act. In the Matter of Chingyuan “Gary” Chang, Exch. Act Rel. No. 99239 (Dec. 26, 2023)
According to the SEC, from approximately June 2013 through February 2022, McKelvey working in Morgan Stanley’s Southlake, TX office, engaged in a fraudulent scheme through which he misappropriated more than $1.7 million from accounts of two elderly relatives who were brokerage customers while he served as their financial advisor. McKelvey was found to have sold securities from the customers’ accounts to generate some of the funds he misappropriated and took steps attempting to conceal his misconduct.
On June 6, 2023, McKelvey pled guilty to one count of money laundering before a United States Magistrate Judge in the United States District Court for the Eastern District of Texas, in United States v. McKelvey, Crim. No. 4:23-CR-75. The Court accepted McKelvey’s plea on July 8, 2023. In connection with that plea, McKelvey admitted, inter alia, that beginning in approximately 2009, he began misappropriating investor funds held in brokerage accounts Morgan Stanley. Transfers totaling over $1.15 million were primarily to pay his and his wife’s credit cards. In total, McKelvey misappropriated at least $1.5 million in investor funds. Astonishingly, for “virtually all of these unauthorized payments, the payment instructions received by Morgan Stanley identified McKelvey or his wife as the beneficiary of the payment.” SEC v. Douglas McKelvey, No. 23-cv-00564-O (N.D. Tex.)(April 26, 2024).
However, Morgan Stanley failed to detect more than 250 unauthorized payments.
According to the SEC Action, from approximately 2014 through 2021, Jesus Rodriguez engaged in a fraudulent scheme to misappropriate more than $3.4 million from the accounts of at least ten investors while he served as their registered representative and/or investment adviser representative at Morgan Stanley. Rodriguez carried out his misappropriation scheme by initiating fraudulent disbursements of funds primarily through unauthorized ACH transfers, wire transfers, and cash journal transfers to other accounts at the firm.
Rodriguez misappropriated from his Morgan Stanley customer accounts by incurring unauthorized indebtedness collateralized by their securities accounts, and also sold securities from customer accounts before misappropriating all or part of the sales proceeds. SEC v. Jesus Rodriguez (24-cv-00027) (W.D. Texas)
Between November 2018 and July 2021, Rodriguez made approximately 185 unauthorized payments from accounts of his Morgan Stanley customers while he was employed as a registered representative. For approximately 83 of these unauthorized payments, the payment instructions received by Morgan Stanley identified Rodriguez or some similar variant of his name as the beneficiary of the payment.
However, once again Morgan Stanley failed to detect these unauthorized transfers.
Interestingly enough, in June 2015, the Financial Industry Regulatory Authority (“FINRA”) issued a Letter of Acceptance, Waiver and Consent in which it found that from at least June 2009 through November 2014, Morgan Stanley Smith Barney had failed to establish, maintain and enforce supervisory systems and written procedures that were reasonably designed to review and monitor the transmittal of funds from customer accounts, including by failing to review and monitor outgoing wire transfers and branch checks disbursed from multiple customer accounts to the same third-party account.
FINRA found further that as a result, between October 2008 and June 2013, three Morgan Stanley Smith Barney registered representatives in two different branch offices were able to convert, collectively, almost $500,000 from thirteen brokerage customer accounts through fraudulent wires and branch checks sent from the customers’ accounts to third-party accounts. Morgan Stanley Smith Barney represented to FINRA that it implemented a manual report to address those deficiencies in December 2014.
However, it was not until February 2021, after inquiries by Commission staff concerning Morgan Stanley’s procedures for detecting unauthorized wires from multiple unrelated client and customer accounts to single external third-party accounts, that Morgan Stanley Smith Barney discovered that the fraud detection software it began using in October 2015 had never been calibrated to monitor this pattern of wire activity. Morgan Stanley reported that discovery to the Commission staff in February 2021.
In connection with its $15 million fine, and promise to remedy its defective supervision, Morgan Stanley admitted to the willfully violation of Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, which require, among other things, that a registered investment adviser adopt and implement written policies and procedures reasonably designed to prevent violation of the Advisers Act and the rules thereunder by the adviser and its supervised persons.
Morgan Stanley admitted that it failed reasonably to supervise its stockbrokers within the meaning of Section 15(b)(4)(E) of the Exchange Act, with a view to preventing and detecting their violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
Investors whom have had their funds stolen or misappropriated by their stockbrokers, or even by third parties, may be able to recover their funds by bringing an action against their brokerage firm.
Guiliano Law Group
Our practice is limited to the representation of investors. We accept representation on a contingent fee basis, meaning there is no cost to you unless we make a recovery for you. There is never any charge for a consultation or an evaluation of your claim. For more information, contact us at (877) SEC-ATTY.
For more information concerning common claims against stockbrokers and investment professionals, please visit us at securitiesarbitrations.com
