Morgan Stanley Fined Again – This Time for Overcharges

The New Financial Industry Regulatory Authority (FINRA) has fine Morgan Stanley $1.5 million and ordered restitution of $4.6 million for overcharging clients on bonds.

FINRA is the former NASD, plus the NYSE regulatory unit, and is the primary regulator of the securities industry. FINRA discovered that Morgan Stanley’s retail unit had overcharged clients on 2,800 purchases totaling $59 million. The securities in question are notes issued by Kemper Lumbermen’s Mutual Casualty Co.

The value of bonds is often difficult to determine and unwary clients can often easily become victims of overcharges. A rule of thumb is that securities should not be marked up more than 5%, except in extraordinary situations. However, markups on debt instruments, including bonds and notes, should be even lower because such markups greatly alter the investor’s return.

For example: Bonds that pay 6% and mature in 15 years, but sell for 85% of their face value, offer a current return about 7% and a yield to maturity of more than 8%. Marked up 18% these bonds would sell at 100% of their face value (par) and only pay 6% in total return – substantially lower than the same bonds if not marked up. In fact, it would take three years of income to recover such a huge markup.

Morgan Stanley has been at the center of a number of scandals and investigations and has been repeatedly fined by regulators in the past few years. A recent shake-up at the firm was designed to stem the tide of problems which had surfaced during the past decade since that firm bought Dean Witter Securities.

Additional information regarding Morgan Stanley and that firm’s recent problems available here.

Shepherd Smith and Edwards represents investors nationwide in claims of wrongdoing by members of the securities industry, including in claims against Morgan Stanley. If you, your firm or your pension fund has sustained losses as a result of fraud, negligence or other acts or omissions and are curious whether you may be able to recover all or part of your losses contact us to arrange a free consultation with one of our attorneys.