Financial institution Morgan Stanley will shell out a sum of $15 million due to the stolen assets by its former employees.
Morgan Stanley Faces SEC Settlement Over Compliance Failures and Theft Allegations
Morgan Stanley Smith Barney 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 from customers' accounts.
The SEC states 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 alleges that Morgan Stanley violated the "compliance rule" of the Advisers Act due to this lack of system.
According to the SEC, Morgan Stanley neither admitted nor denied the allegations, but the firm's several self-reports, substantial cooperation, and remedial efforts, including compensating the financial advisors' victims, were taken into account.
The SEC has identified the four ex-employees of Morgan Stanley as Michael Carter, Jesus Rodriguez, Douglas McKelvey, and Chingyuan "Gary" Chang. Chingyuan "Gary" Chang was dismissed by Morgan Stanley months earlier on similar allegations, and the Financial Industry Regulatory Association barred him in December 2022 over allegations of misappropriating about $58,560 from four clients. Douglas McKelvey pleaded guilty in 2023 to stealing at least $1.5 million from his family members.
In a statement, Sanjay Wadhwa, acting director of the SEC's Division of Enforcement, stated, "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 also notes that Morgan Stanley did not test for the effectiveness of the third-party fraud detection software it installed in 2015 for the next five years. Morgan Stanley failed to implement a procedure to detect instances when unrelated clients of the same financial adviser transferred money to the same third-party account until February 2021.
As part of the settlement, Morgan Stanley has agreed to let a compliance consultant review all forms of third-party cash disbursements from customer accounts.
This is not the first time Morgan Stanley has faced regulatory action over compliance failures. In 2019, the Office of the Comptroller of the Currency fined Morgan Stanley $60 million for failures in overseeing the decommissioning of data centers, including improper vendor risk assessment and failure to remove personal data from retired hardware related to its wealth management unit, which includes Smith Barney operations.
In September 2022, the SEC fined Morgan Stanley $35 million for failing to properly dispose of devices containing sensitive data belonging to 15 million customers, resulting in exposure of personal information after the devices were sold on internet auction sites by an unqualified moving company.
The history of theft allegations connected to the Smith Barney merger includes an earlier period before the merger with Citigroup, but the main recent theft allegations involve Smith Barney advisers stealing client funds due to poor internal controls discovered by the SEC in 2025.
Morgan Stanley has stated that it believes no customer data was accessed or misused in these incidents and has implemented stronger security and supervisory controls following these regulatory actions. The regulatory authorities involved include the SEC, FINRA, and the Office of the Comptroller of the Currency, each imposing fines for various compliance failures spanning data privacy, supervisory negligence, and client fund theft.
References:
- SEC Press Release
- Bloomberg News
- Wall Street Journal
- Reuters News
- The settlement between Morgan Stanley and the SEC highlights the need for robust compliance and supervisory policies in the finance industry, especially in the realm of wealth management and personal finance.
- The news of Morgan Stanley's settlement over compliance failures and theft allegations has been a general topic in financial news outlets, such as Bloomberg News, Wall Street Journal, and Reuters News.
- The SEC's investigation into Morgan Stanley's compliance failures has revealed that the company failed to adequately test its fintech systems, which could potentially pose risks for the entire financial sector.
- The series of compliance failures and theft allegations against Morgan Stanley, including those involving its wealth management unit Smith Barney, underscores the importance of crime and justice in the finance industry, emphasizing the need for stricter regulations and oversight.
