Morgan Stanley offices in Baltimore, MD. Photo: Diego M. Radzinschi/ALM
Morgan Stanley has agreed to pay the Securities and Exchange Commission (SEC) a $15 million penalty, with failing to reasonably supervise four investment adviser and registered representatives in its Smith Barney unit who stole millions of dollars of advisory clients’ and brokerage customers’ funds and for failing to adopt policies and procedures reasonably designed to prevent and detect such theft.
The four advisors, located in Texas and California – Michael Carter, Chingyuan “Gary” Chang, Douglas McKelvey and Jesus Rodriguez – "collectively, misappropriated millions of dollars from customer and client accounts primarily through two forms of third-party disbursements: unauthorized ACH payments and unauthorized wire transfers," the order states.
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“Over a seven-year period, [Chang, McKelvey and Rodriguez] misappropriated a total of more than $1.7 million through unauthorized externally-initiated ACH payments," the order states.
Until at least December 2022, Morgan Stanley Smith Barney “failed to adopt and implement policies and procedures reasonably designed to prevent” its financial advisors from using two forms of unauthorized third-party disbursements, Automated Clearing House (ACH) payments and certain patterns of cash wire transfers, to misappropriate funds from advisory client accounts and brokerage customer accounts, according to the SEC order. Financial advisors made hundreds of unauthorized transfers from customers’ or clients’ accounts to themselves or for their own benefit.
“Safeguarding investor assets is a fundamental duty of every financial services firm, but MSSB’s supervisory and compliance policy failures let its financial advisors make hundreds of unauthorized transfers from their customer and client accounts and put many other such accounts at significant risk of harm,” said Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement.
According to the SEC’s order, until at least December 2022, MSSB did not have a policy or procedure to screen externally initiated ACH payment instructions to detect instances in which an MSSB financial advisor assigned to the account bore the same name as the beneficiary listed in the ACH payment instructions. This led to the firm failing to detect “hundreds of unauthorized ACH transfers” between May 2015 and July 2022 from its customers’ or clients’ accounts to pay the credit card bill of the financial advisor assigned to the MSSB account or to otherwise benefit the financial advisor, according to the order.
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Carter was sentenced to five years in prison for making more than 50 unauthorized transfers from clients, totaling $6.15 million, to fund his own expenses. Rodriguez, based in El Paso, Texas, was charged in January with stealing $3.5 million from customers. McKelvey pleaded guilty in 2023 to stealing at least $1.5 million from his mother and mother-in-law. The Financial Industry Regulatory Association barred Chang in 2022 over allegations that he misappropriated about $58,560 from four clients.
On Monday, Morgan Stanley said in a statement that "these were isolated events, each of which occurred several years ago. We take these incidents very seriously and have since enhanced our control framework, working in conjunction with an outside expert ... When we learned of the wrongdoing, we conducted an internal investigation, terminated the wrongdoers, reported them to the proper authorities and worked with affected clients to compensate them for any harm.”
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Lynn Cavanaugh
Lynn Varacalli Cavanaugh is Senior Editor, Retirement at BenefitsPRO. Prior, she was editor-in-chief of the What's New in Benefits & Compensation newsletter. She has worked for major firms in the employee benefits space, Vanguard and Willis Towers Watson, as well as top media companies, including Condé Nast and American Media.
