FINRA fined Morgan Stanley Smith Barney, LLC and Scottrade, Inc. a combined $950,000 for the firms' failure to maintain reasonable supervisory systems to monitor for wire transfers out to third-party accounts. The report indicates that these failures contributed to undetected fraudulent transfers through 2013.
Regulators also noted that although FINRA had informed both Morgan Stanley and Scottrade of "significant gaps in their systems," both firms failed to implement sufficient corrections to the problem until several years had already transpired.
The news release states that three Morgan Stanley brokers in multiple branch offices converted nearly $500,000 from at least 13 customers through the use of fraudulent wire transfer orders and branch checks from the victimized customers' Morgan Stanley accounts to third-party accounts—for example, FINRA referred to representatives moving funds from multiple customer accounts directly to their own personal bank accounts.
FINRA concluded that Morgan Stanley's supervisory systems were inadequate because the firm failed to review and monitor transmittal of customer funds, notably via wire transfers out to third party accounts and other outside entities, which allowed the aforementioned fraudulent conversions to transpire undetected.
As for Scottrade, FINRA found that wire transfers from internal customer accounts to third-party accounts or entities of less than $200,000 were not subject to customer confirmations, that Scottrade failed to ensure its staff obtained appropriate confirmations for wire transfers between $200,000 and $500,000, and that this failure to implement adequate supervisory systems persisted from 2011-2013, during which time Scottrade processed over 17,000 third-party wire transfers totaling in excess of $880 million.
We have represented clients whose accounts have been looted by unauthorized third-parties. Brokerage firms have an obligation to safeguard their clients' money. In the cases we've seen, the third-party (often another family member) initiated a wire transfer or forged checks to gain access to the funds. In each case, the brokerage firms denied all responsibility and tried to blame their clients. Only through vigorous discovery, rebuffing frivilous motions to stay the case, and fighting to the arbitation have we been successful in convincing the brokerage firms to make right with their clients.
If you have invested with Morgan Stanley, Scottrade or with any other FINRA-member firm or brokerage whose failure to obtain confirmations and customer approval for third-party wire transfers, inadequate supervision or failure to detect suspicious red flag activity has resulted in misappropriation or fraudulent conversion of funds that have proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for investigation and consultation.
News Release: FINRA Fines Morgan Stanley Smith Barney and Scottrade a Total of $950,000 for Failing to Supervise the Transmittal of Customer Funds to Third-Party Accounts (FINRA)