Under the contest terms, advisers could make $1K for 10 loans, $3K for 20 loans, and $5k for 30 loans. Advisers that participated were purportedly able to generate $24M from these new loans. Massachusetts has noted that internally the Morgan Stanley does not allow incentives of running such contests.
Bloomberg reports that it was Morgan Stanley’s compliance and risk office that found out about the contests in 12/14 but it did not close them down until 4/15. Galvin said that the firm denied to the public that the contests existed.
In addition to accusing the firm of unethical conduct, the state claims that Morgan Stanley advisers violated their fiduciary obligation to clients when they recommended that they incur the debt.
The state wants an administrative fine, a cease and desist, a censure, and “equitable relief” for those who took out loans.
Morgan Stanley denies the inappropriate sales charges. It maintains that the securities-based loan accounts are “valuable” to clients and they offer inexpensive liquidity.
The unsuitable sales contest charges are not the only reason that Morgan Stanley is in the headlines this week. One of its ex-brokers, Jeffrey Hunter Smith, has been barred from associating with any brokerage firm that is regulated by the Financial Industry Regulatory Authority. Smith received two unauthorized loans of $150K each from two clients.
FINRA said that Smith did not get the written approval that is required from Morgan Stanley for such loans. The firm’s written supervisory procedures bar brokers from getting involved with a borrowing arrangement with a firm client unless that party is an immediate family member. Also, written notice must be provided to the firm ahead of time.
Smith is also accused of violating FINRA rules by refusing to provide the self-regulatory organization with documents that it requested as part of its probe.
Also in trouble is ex-Morgan Stanley and Oppenheimer & Co. (OPY) broker-dealer Vladimir Eydelman.
Eydelman is one of three men convicted in a $5.6M insider trading scam that took place at Grand Central Terminal in New York. Last week, Eydelman, who has pleaded guilty to criminal charges, was sentenced to three years in prison. He has been fined $15K and must forfeit over $1.2M.