Morgan Stanley

Securities News: Tax Reporting Mistake Costs Morgan Stanley $70M, SEC Accuses Trading Firm & Broker-Dealer of Manipulation, Layering Schemes, and RD Legal Capital’s Hedge Fund is Accused of Targeting Injured NFL Players & 9/11 Responders

Published on: March 9, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley Ordered to Pay $70M for Tax-Reporting Errors
In its yearly regulatory filing, Morgan Stanley (MS) announced that it took a $70M charge because of tax-reporting mistakes made by its brokerage business from ’11 to ’16. The firm is talking to the Internal Revenue Service to settle any client tax underpayments. Morgan Stanley said that some of its wealth management clients that may have overpaid taxes as a result of these errors and they would be paid back.

The firm also announced that it might sustain a $221.3M loss because of a lawsuit brought by Salzburg, the Austrian state, over commodities derivatives and fixed-income transactions between ’05 and ’12. Salzburg claims that Morgan Stanley did not having the authority or ability to make such deals—a contention that the latter disputes.

Trading Firm Accused of Manipulating US Markets
According to a complaint brought by the US Securities and Exchange Commission, Avalon FA manipulated the US markets on hundreds of thousands of occasions, allegedly making over $21M in a layering scam. The regulator obtained an asset freeze against the Ukrainian trading company.

Morgan Stanley to Pay $8M To Settle Exchange Traded-Fund Investment Charges

Published on: February 14, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley Smith Barney (MS) has consented to pay a penalty of $8M to resolve Securities and Exchange Commission charges accusing the firm of wrongdoing involving single inverse exchange-traded fund investments. Morgan Stanley admitted wrongdoing as part of the settlement.

According to the SEC’s order, Morgan Stanley failed to adequately put into place procedures an policies to make sure that clients comprehended the risks involved in buying inverse ETFs and did not procure signatures from several hundred clients on a client disclosure notice that stated that these ETFs are usually not suitable for investors intending to keep them longer than a trading session unless the securities are part of a hedging or trading strategy.

Morgan Stanley persuaded investors to buy single inverse ETFs in accounts, including retirement accounts. Securities were held-long term. As a result, many of these advisory clients suffered losses.

SEC Charges Connecticut RIA with $3.95M Fraud, Ex-Morgan Stanley Financial Adviser with $5M Securities Scam

Published on: February 8, 2017 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has filed fraud charges against Sentinel Growth Fund Management and its owner Mark J. Varacchi. The regulator is accusing the Connecticut-based investment advisory firm of stealing at least $3.95M from investors. Over $1M was allegedly used to resolve private litigation in which Varacchi was the defendant.

According to the Commission, Sentinel Growth Management Fund and Varacchi misrepresented to investors that their money would go to hedge fund managers to be invested. Instead, the investment advisor firm allegedly commingled investor money and manipulated account balances, activities, and investment returns as part of a securities fraud.

Now, the SEC wants disgorgement and penalties brought against Varacchi and his firm in this investment advisor fraud case.

Puerto Rico Defaults on More Debt Payments

Published on: January 31, 2017 | by Shepherd Smith Edwards & Kantas, LLP

The Puerto Rico government has defaulted on more debt payments that were due to bondholders. The U.S. Territory did not meet the February 1, 2017 due date on $312 million in principal plus interest. The default includes Puerto Rico General Obligation bonds that are supposed to be constitutionally protected.

The Puerto Rican Government Development Bank owes $279 million of the defaulted debt. A spokesperson for Puerto Rico’s Aqueduct and Sewer Authority, however, said that the Commonwealth paid $295 million of interest, which was due on some of the debt.

Puerto Rico owes $70 billion of debt and the island has been embroiled in financial troubles for over three years. The territory has struggled to pay back the debt it owes, defaulting more than once on payments that were due. Last weekend, Puerto Rico’s federal oversight board voted to extend the stay placed on litigation against the island for debt payments that have been missed. The stay was supposed to lift on February 15, 2017. Now that date is May 1, 2017.

The island’s new governor, Ricardo Rosselló, was also granted an extension for when he has to turn in a fiscal blueprint, mapping out how Puerto Rico plans to restore its fiscal health. He now has until February 28, 2017.

Citigroup and Morgan Stanley to Pay Over $5.9M to Settle SEC Charges That They Misled Investors About Forex Trading Program

Published on: January 24, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley Smith Barney (MS) and Citigroup Global Markets (MS) have settled civil charges brought by the US Securities and Exchange Commission accusing the two firms of making misleading and false statements about the CitiFX Alpha, which is a foreign exchange trading program. Without denying or admitting to the regulator’s findings, Morgan Stanley and Citigroup will each pay more than $624K of disgorgement, interest of over $89K, and a $2.25M penalty.

Citigroup’s ownership interest in Morgan Stanley was a 49% stake during the period at issue, from 8/2010 to 11/2011, when the firms’ registered representatives were marketing the CitiFX Alpha to Morgan Stanley customers.

However, according to the regulator, the oral and written representations that these representatives made were based on previous risk metrics and performance. Meantime, they purportedly did not do an adequate enough job of disclosing to investors that the latter could be put into the forex trading program with the use of more leverage than what was promoted, as well as that there would be markups for each trade.

SEC Cases: Morgan Stanley to Pay $13M for Custody Rule Violations and Overbilling Clients, BNY Mellon to Settles Allegations of Reported Miscalculations By Paying $6.6M, and Citadel Securities to Pay $22M for Purportedly Misleading Clients About Pricing Trades

Published on: January 17, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley Accused of Overbilling Investment Advisory Clients

The US Securities and Exchange Commission announced that Morgan Stanley Smith Barney (MS) will pay a $13M penalty to resolve charges accusing the firm of overbilling clients through billing system and coding mistakes and violating the custody rule regarding yearly surprise exams.

As a result, said the regulator’s order, Morgan Stanley has agreed to pay over $16M in excess fees because of billing mistakes that took place from ’02 to ’16. Investment advisory clients that were affected have been paid back the excess fees in addition to interest.

According to the Commission, Morgan Stanley overcharged over 149,000 investment advisory clients. The reason for this is that the firm did not put into place compliance policies and procedures that were designed reasonably enough to make sure that clients were accurately billed according to their advisory agreements. The SEC said that Morgan Stanley did not validate billing rates that were in its billing system against client billing histories, contracts, and other documents.

Retiree Files $1M Securities Arbitration Claim Against Morgan Stanley

Published on: January 6, 2017 | by Shepherd Smith Edwards & Kantas, LLP

An investor who is retired and suffering from health issues is seeking $1M from Morgan Stanley (MS). The investor, a former inventor, claims that the broker-dealer did not properly supervise the financial adviser who handled his multi-million dollar account. He filed a Financial Industry Regulatory Authority claim and is accusing the firm of breach of fiduciary, negligence, unauthorized trading, excessive trading, fraudulent inducement, and significant tax liability.

The investor believes that over-concentation in risky sectors and over trading in too many individual stocks occurred, causing significant damage to his retirement funds. Among the investments that were involved were oil and gas investments, including Master Limited Partnerships. The claimant claims that Morgan Stanley hid the risks involved, even as the financial adviser engaged in a purportedly deceptive investment strategy. The result was that the investor’s account became heavily concentrated in risky investments.

The alleged broker negligence also purportedly caused tax consequences for the investor while benefiting Morgan Stanley with transactions costs of over $1M. The unsuitable taxable gains that were created by led to investment losses for the investor, even as the broker claimed that the investor’s account was profiting.

Merrill Lynch, UBS, & Morgan Stanley Are Among Firms Ordered to Pay Investors Approximately $30M Collectively Over Puerto Rico Bond Fund Losses in 2016

Published on: December 26, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Even after more than three years since the Puerto Rico bonds and closed-end bond funds originally dropped in their initial value, many investors are still waiting to recoup losses they sustained from investing in these securities. Meantime, the U.S. territory continues to deal with its financial woes as it struggles to pay back its $70 billion of debt. At Shepherd Smith Edwards and Kantas, our Puerto Rico municipal bond fraud attorneys have worked hard this year in helping our clients, who are among the thousands of investors from the Commonwealth that suffered significant losses when the island’s securities plunged in value in 2013, in trying to recoup their money.

Below is a recap of some of the significant claims recovered for Puerto Rico investors this year that made the headlines:

A Financial Industry Regulatory Authority (FINRA) Arbitration panel ordered Morgan Stanley (MS) to pay a New Jersey widow over $95,000. Morrisa Schiffman accused the broker-dealer of making unsuitable recommendations to her, as well as of inadequate supervision and disclosure failures. Her FINRA Panel ultimately agreed.

Merrill Lynch was ordered to pay $780,000 in restitution to customers who invested in Puerto Rico closed-end bond funds and municipal bonds. FINRA found that the brokerage firm did not have the proper procedures and supervisory systems in place to ensure that all of the transactions were suitable for a number of these investors. Customers affected, in particular, are those with holdings that were heavily concentrated in Puerto Rico municipal bonds, as well as with holdings were highly leveraged via loan managed accounts or margin. FINRA said that from 1/2010 through 7/2013, 25 leveraged customers who had moderate or conservative investment objectives and modest net worths saw the securities they’d invested in sustain aggregate losses of nearly $1.2M. The customers had at least 75% of their assets in Puerto Rico securities that were ultimately liquidated to meet margin calls.

Morgan Stanley Settles Margin Account-Related Violations with FINRA & The SEC for $10.3M

Published on: December 21, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Two US regulators have fined Morgan Stanley (MS) for margin account violations that purportedly resulted in the firm using customer funds and securities for its benefit. The US Securities and Exchange Commission fined the firm $7.5M, while the Financial Industry Regulatory Authority imposed a $2.75M fine.

According to the SEC, Morgan Stanley used trades that involved customer money to decrease its borrowing costs. The Commission said that this violates the agency’s Customer Protection rule, which is meant to keep customer money and securities safe so that they can be given back to customers in the event that a brokerage firm were to fail.

The SEC said that from 5/2013 to 5/2015, the firm’s broker-dealer in the US used transactions with an affiliate to decrease the amount it had to deposit in its customer reserve account. Under the Customer Protection Rule, brokerage firms are not allowed to use affiliates to lower their customer reserve account deposit requirements.

Securities Cases: Merrill Lynch Ordered to Pay $2.8M for Supervisory And Other Violations, Ernst & Young Agrees to Pay $11.8M for Failed Audits, and Ex-Morgan Stanley Client Administrator is Suspended Over Fraudulent Wire Transfer

Published on: October 20, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Financial Industry Regulatory Authority Fines Merrill Lynch $2.8M

FINRA has fined Merrill Lynch, Pierce, Fenner and Smith Inc. $2.8 million. By settling, the firm is not denying or admitting to the self-regulatory organization’s charges.

FINRA said because of system errors, Merrill Lynch inaccurately reported millions of trades. The regulator said that Merrill Lynch’s supervisory system as it relates to specific matters related to documenting, reporting, and records was not designed in a reasonable manner.

Ernst & Young Settles Audit Failure Charges By Agreeing to Pay Over $11.8M

Ernst & Young LLP has agreed to resolve U.S. Securities and Exchange Commission charges accusing it of audit failures. The monetary settlement, along with the $140M penalty that audit client Weatherford International agreed to pay separately, will go back to investors who were hurt in the accounting fraud.