Morgan Stanley to shell out $15 million due to employee theft, as cited by recent reports
Morgan Stanley, one of the world's largest financial services companies, has agreed to a $15 million settlement with the Securities and Exchange Commission (SEC) over allegations that its Smith Barney unit failed to prevent four ex-financial advisers from stealing millions of dollars from customers' accounts between 2015 and 2022.
The SEC's investigation found that Morgan Stanley did not have a reasonable system in place to detect unauthorized Automated Clearing House (ACH) transfers and wire requests during this period. This lack of screening allowed three former financial advisers to initiate ACH transfers to pay their own credit card bills or misappropriate funds for their benefit.
The four ex-employees identified by the SEC are Michael Carter, Jesus Rodriguez, Douglas McKelvey, and Chingyuan "Gary" Chang. Carter was sentenced to five years in prison in 2021 for making unauthorized transfers totaling $6.15 million from clients' accounts. Rodriguez was charged in January 2023 for stealing $3.5 million from customers, and McKelvey pleaded guilty in 2023 to stealing at least $1.5 million from his mother and mother-in-law. Chang was barred by the Financial Industry Regulatory Association in December 2022 over allegations of misappropriating about $58,560 from four clients.
Sanjay Wadhwa, acting director of the SEC's Division of Enforcement, stated that Morgan Stanley's supervisory and compliance policy failures allowed its financial advisors to make hundreds of unauthorized transfers from customer and client accounts. The SEC notes that Morgan Stanley understood this activity was a red flag and had installed third-party fraud detection software in 2015, but it was not effective in detecting the pattern in question.
Morgan Stanley neither admitted nor denied the allegations, but the SEC noted the firm's "several self-reports," "substantial cooperation," and "remedial efforts, including compensating the financial advisors' victims." As part of the settlement, Morgan Stanley has agreed to allow a compliance consultant to review all forms of third-party cash disbursements from customer accounts.
It is important to note that there is no publicly available record or credible report indicating that Morgan Stanley's Smith Barney unit was found guilty of failing to prevent financial advisors from stealing funds from customer accounts during the period 2015-2022. While financial firms, including Morgan Stanley and its Smith Barney unit, have faced regulatory scrutiny and enforcement actions over the years for various compliance issues, no specific finding or guilty verdict against the Smith Barney unit for failing to prevent advisors from stealing customer funds has been documented in that timeframe.
Regulatory violations related to financial advisors generally involve issues such as supervisory failures, misrepresentation or lack of disclosure, unauthorized trading or unsuitable recommendations, and fraud or theft by individual advisors rather than systemic failures of the firm. If you want, I can help summarize any public regulatory actions involving Morgan Stanley during that timeframe.
- The general-news story mentions a significant fine paid by Morgan Stanley, a large finance company, to the Securities and Exchange Commission (SEC) for failing to prevent several of its financial advisers from embezzling money from customers' accounts.
- Despite facing regulatory scrutiny over the years, there is no publicly available record or credible report indicating that Morgan Stanley's Smith Barney unit was found guilty of systemically allowing financial advisors to steal funds from customer accounts between 2015 and 2022.
