The CFTC is ordering Morgan Stanley Smith Barney LLC (MS) to pay a civil monetary penalty of $200,000 for alleged supervisory failures related to customer account handling by employees, which is a violation of CFTC regulation 166.3. Its Order maintains that Morgan Stanley did not have adequate supervisory and internal controls in place that would have allowed it to successfully discourage and detect CFTC and CEA regulation violations.
Per the CFTC, the financial firm had a customer that acted as a futures commission merchant even though it wasn’t registered as one. (This is a Commodity Exchange Act violation.) The agency contends that by failing to look into suspect transactions that indicated this client was engaging in unlawful behavior, Morgan Stanley was committing a CFTC regulation 166.3 violation.
The CFTC says that even after Morgan Stanley discovered in January 2010that the client had been improperly carrying its proprietary futures trading account since 2006, it let the customer keep on in the role as a futures commission merchant through May 2010.
In other Morgan Stanley related news, five Detroit, Michigan homeowners are suing the financial firm for what they are claiming is racial bias over the way the firm finances and funds mortgage loans. They believe that this statistically increased African Americans’ exposure to foreclosure. The case, which is being presented as a class action lawsuit, could involve up to 6,000 plaintiffs.
The lead plaintiffs are alleging Michigan civil rights statute and federal anti-bias law violations in Morgan Stanley’s securitizing of mortgage loans that it was aware would expose borrowers to a higher foreclosure risk. Per their lawsuit, the investment bank’s sale and packaging of New Century loans to investors was closely linked to how it funded and financed New Century even before the loans were made.
Between 2004 and 2007, Morgan Stanley gave New Century billions of dollars in credit lines and issued procedures and policies that resulted in loans with high debt-to-income ratios, teaser rates that were low, hardly, if any, income verification, and other features. The plaintiffs believe that the financial firm dictated the kinds of loans that New Century issued, even requiring, as a condition of their profitable business relationship, that a huge percentage of the loans come with “dangerous” traits. Such obligations, they contend, negatively impacted African-American borrowers in the Detroit area who got their loans from New Century. In 2007, New Century sought bankruptcy protection.
According to the attorneys that filed the complaint, this is the first lawsuit to claim a connection between racial discrimination and securitization, as well as the first one involving homeowners accusing an investment bank, rather than the lender, of causing borrowers harm.
CFTC Orders Morgan Stanley Smith Barney LLC to Pay $200,000 for Supervision Violations, CFTC, October 22, 2012
Adkins, et al. vs. Morgan Stanley, ACLU, October 15, 2012
More Blog Posts:
Texas Securities Roundup: Morgan Stanley Smith Barney Sued Over Financial Adviser’s Ponzi Scam, Judge Dismisses Ex-GE Executive Whistleblower’s Lawsuit Over His Firing, & Ex-Stanford Financial Group CIO Pleads Guilty to Obstructing the SEC’s Probe, Stockbroker Fraud Blog, July 3, 2012
Why Were Two Former Morgan Stanley Smith Barney Brokers Not Named As Defendants in Securities Lawsuit by State Regulators Over $6M Now Missing From Wisconsin Funeral Trust?, Stockbroker Fraud Blog, September 27, 2012
Ex-Morgan Stanley Smith Barney Broker Settles with FINRA for Allegedly Failing to Notify Firm of Previous Arrest, Stockbroker Fraud Blog, June 16, 2012
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