On June 22, 2015, the Financial Industry Regulatory Authority, Inc. (“FINRA”) announced that it had reached a near $1 million settlement with Morgan Stanley Wealth Management (“Morgan Stanley”) and Scottrade Inc. (“Scottrade”) for failing to supervise wire transfers. Brad Bennett, Executive Vice President and Chief of Enforcement at FINRA, commented on the settlements and stated, “Firms must have robust supervisory systems to monitor and protect the movement of customer funds. Morgan Stanley and Scottrade had been alerted to significant gaps in their systems by FINRA staff, yet years went by before either firm implemented sufficient corrective measures.” A complete copy of the FINRA press release is available here.
Through a Letter of Acceptance Waiver and Consent (“AWC”), Morgan Stanley submitted to censure and agreed to pay a $650,000 to settle charges that from at least June 2009 through November 2014, Morgan Stanley failed to establish, maintain and enforce reasonable supervisory systems and written procedures regarding outgoing wire transfers and branch check disbursements from customer accounts. Additionally, from approximately June 2009 through September 2011, Morgan Stanley failed to establish and maintain reasonable supervisory systems regarding its third-party service provider’s coding and acceptance of money orders, which were deposited into customer accounts. The Morgan Stanley AWC may be found here.
Specifically, FINRA alleged that between October 2008 and June 2013, three (3) Morgan Stanley registered representatives, in two (2) branch office locations, collectively converted approximately $494,400 from thirteen (13) Morgan Stanley customer accounts by causing fraudulent wire transfers and branch checks to be sent to third-party accounts. During this time, Morgan Stanley had no supervisory procedures in place to detect and monitor disbursements from separate accounts to the same third-party account. Additionally, Morgan Stanley’s system did not address comparing customers’ signatures on outgoing wire transfer request forms with those on file. Furthermore, Morgan Stanley’s third-party service provider miscoded certain types of customer deposits that would have raised red flags earlier. Together, FINRA alleged that Morgan Stanley’s supervisory failures constituted violations of NASD Rule 3012, NASD Rule 3010, and FINRA Rule 2010.
Scottrade, through an AWC, also submitted to censure and agreed to pay a $300,000 fine to settle similar FINRA allegations. FINRA alleged that from October 2011 through October 2013, Scottrade failed to establish and maintain a supervisory system that was reasonably designed to confirm with customers all wire transmittals from customer accounts to third party accounts, in violation of NASD Rule 3010(a), NASD Rule 3012, and FINRA Rule 2010. The FINRA AWC may be found here.
Specifically, FINRA alleged that in 2011, it cautioned Scottrade regarding its failure to establish a system reasonably designed to notify customers of third party wire transfers of $500,000 or less, and to document such notification. In response, Scottrade committed to implementing such a system, but failed to do so, until October 2013. According to FINRA, in the interim, Scottrade’s supervisory system was deficient because it: 1) failed to obtain customer confirmation for wire transfers less than $200,000 and 2) improperly required branch managers to confirm wire transfers between $200,000 — $500,000, rather than persons senior to and independent of the producing manager. During this period Scottrade processed 17,413 third-party wire transfers in the aggregate amount of $883,944,371.
When broker-dealers fail to establish and maintain reasonable supervisory systems designed to protect their clients from malfeasant brokers, those brokers may cause significant damages to their customers’ investment accounts. If you are a victim of broker malfeasance or fraud, contact the investment fraud attorneys at Lax Neville LLP today at (212) 696-1999 and schedule a consultation.