Morgan Stanley Smith Barney Charged by SEC for Allowing Investment Advisers to Steal Millions

The U.S. Securities and Exchange Commission (SEC) announced on Tuesday that Morgan Stanley Smith Barney (MSSB) is facing charges due to inadequate supervision and internal controls that enabled four of its investment advisers to misappropriate millions of dollars from clients before their actions were discovered.

Federal regulations prohibit investment advisers from withdrawing money from client accounts without explicit permission. Advisers are forbidden from transferring client funds into their personal accounts.

In a settlement agreement, MSSB has consented to pay $15 million. The SEC noted that the firm did not establish necessary policies and procedures until December 2022 to prevent or detect employee theft.

The infractions occurred between May 2015 and July 2022, during which the advisers allegedly utilized Automated Clearing House payments to illicitly transfer funds from clients’ accounts to their own. These stolen funds were reportedly used to pay personal credit card bills, according to the SEC’s order.

The advisers executed hundreds of unauthorized transactions that went undetected, initiating these transfers from outside the firm and using their names, with the stolen money deposited into accounts they controlled.

“Safeguarding investor assets is a fundamental duty of every financial services firm, but MSSB’s supervisory and compliance policy failures let its financial advisers make hundreds of unauthorized transfers from their customer and client accounts and put many other such accounts at significant risk of harm,” stated Sanjay Wadhwa, acting director of the SEC’s Division of Enforcement, in a press release on Tuesday.

The firm is accused of violating both the Investment Advisors Act of 1940 and the Securities Exchange Act of 1934 by failing to adequately supervise their advisers, all of whom have since left the company.

In addition to the financial penalty, MSSB has reached settlement agreements with clients who were affected by the thefts. The firm has also agreed to have a compliance consultant review all third-party cash disbursements from customer and client accounts.

The SEC acknowledged MSSB’s “several self-reports to, and substantial cooperation with, the commission staff and its remedial efforts, including compensating the financial advisers’ victims and retaining a compliance consultant to conduct a comprehensive review of the relevant policies and procedures,” Wadhwa added.

By fLEXI tEAM