Morgan Stanley Fined $15M for Failure to Detect Theft by Financial Advisors
Morgan Stanley has been fined $15 million for failing to detect the misappropriation of millions of dollars by four of its former financial advisors, as reported by the Securities and Exchange Commission (SEC). The advisors were found to have misused funds from client accounts through unauthorized ACH payments and wire transfers.
According to the SEC, Morgan Stanley did not have adequate policies in place to prevent and detect these unauthorized transactions. This failure spanned from October 2015 until at least February 2021. Despite implementing third-party fraud-detection software in 2015, the firm did not realize that this software was not equipped to identify certain patterns of wire activity. As a result, the misconduct by the advisors went undetected.
The four advisors involved in these illegal activities were Michael Carter, Chingyuan “Gary” Chang, Douglas McKelvey, and Jesus Rodriguez. Carter, who was sentenced to five years in prison in 2021, had defrauded investors of at least $6.15 million. Chang settled SEC charges related to unauthorized disbursements, McKelvey pleaded guilty to misappropriating over $1.5 million, and Rodriguez was charged with misappropriating nearly $3.5 million from clients.
Morgan Stanley has taken responsibility for these incidents and has agreed to a censure, a cease-and-desist order, and a $15 million fine to settle the SEC’s allegations. The firm has also committed to hiring a compliance consultant to review and enhance its policies for detecting third-party cash disbursements.
While Morgan Stanley neither admitted nor denied the SEC’s allegations, the SEC noted that the firm took corrective actions promptly upon learning of the misconduct. A spokesperson for Morgan Stanley emphasized that these were isolated events that occurred several years ago. The firm has since strengthened its control framework and remains committed to prioritizing the interests of its clients.
In conclusion, Morgan Stanley’s failure to properly supervise its financial advisors led to significant financial harm to clients. It serves as a reminder of the importance of robust internal controls and oversight within financial institutions to protect client assets and maintain trust in the industry.
