Prior to December of 2022, MSSB did not have a system that screened and detected unauthorized transfers and payments made by Automatic Clearing House (ACH) and other types of cash transfers. Both methods were unauthorized, and the financial advisors were able to transfer millions of customer funds to their own accounts.
There was no procedure, or electronic detection used at the firm to prevent financial advisors from using these transfers without authorization. MSSB also did not have any policy or procedure that screened the ACH payment instructions the firm received from the originating financial institution for the name of the beneficiary of the ACH payments.
From May of 2015 through July of 2022, four of the firm’s FAs in four different MSSB offices made hundreds of customer fund transfers without detection. Further investigation showed that the FAs made these trades mostly in their own names.
Although MSSB had a third-party fraud detection system, it was not specifically designed to detect this type of wire fraud. The firm did not test the system to “red-flag” these transactions for over five years, therefore failing to supervise its FAs. This failure allowed FAs to make these unauthorized transfers and misappropriate customer funds without detection. Only when the firm received customer complaints did it begin reviewing these transfers and the fraud detection system it had in place at the time.
The Four Financial Advisors
Four MSSB financial advisors were named in the complaint:
- Michael Carter, who transferred over $6 million dollars from four brokerage customers, and an investment advisory client to a third-party bank. At least 54 unauthorized cash wires totaling over $4.5 million were transferred from four unrelated MSSB advisory and brokerage accounts into the same third-party bank account.
- Chingyuan “Gary” Chang, of the firm’s Cupertino, California office, made 40 unauthorized withdrawals totaling $58,000, and the funds went to multiple online accounts in his name. Chang was later terminated.
- Douglas McKelvey, of the firm’s Southlake, Texas (DFW) office, made 250 unauthorized ACH payments from the MSSB accounts of two elderly customers who were also relatives, totaling $1.15 million, with most going to pay his wife’s credit cards and other expenses. McKelvey was later terminated.
- Jesus Rodriguez, of MSSB’s El Paso, Texas office, made 185 unauthorized ACH payments totaling $575,000, with the funds going to his credit cards, a car loan, and other online payment accounts.
These individuals misappropriated millions from their own customers by way of ACH and other types of banking transfers. According to the order, MSSB has already settled with each of the customers individually and separately.
Sanctions
In its agreement with the SEC, MSSB also agreed to:
- Stop activities that comprise violations and any future violations of Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7
- A censure
- $15 million in civil penalties (fines)
- Retain the services of a compliance consultant to review MSSB’s policies and procedures, implement the consultant’s recommendations, submit a report to the SEC, and conduct yearly compliance inspections that include a report to the SEC. The firm will be required to certify in writing of its cooperation to the SEC and evidence that it has complied with the recommended undertakings.
Suspicious Activity Monitoring Relating To Improper Wire Transfers
In today’s complicated financial services world, there are many ways to transfer money between accounts and people. Whether it’s a wire transfer, ACH, check or actual cash changing hands, financial institutions are expected to have complex fraud monitoring detection services and to prevent knowing improper conduct. Generally, a financial advisor such as a stockbroker, should never ask a client to transfer money directly to them. In other circumstances, banks are frequently found liable for knowingly aiding and abetting fraudulent misconduct such as a Ponzi scheme by allowing a fraudster to improperly transfer money to themselves. Claims against financial institutions can be very complex and skilled lawyers with experience with these types of cases can make a big difference for a class action against a commercial bank or in other circumstances.
Did You Invest With Morgan Stanley Smith Barney Or One Of Its Financial Advisors?
Silver Law Group represents investors in securities and investment fraud cases. Our lawyers are admitted to practice in New York and Florida and represent investors nationwide to help recover investment losses due to stockbroker misconduct. If you have any questions about how your account has been handled, call to speak with an experienced securities attorney. Most cases are handled on a contingent fee basis, meaning that you won’t owe us until we recover your money for you. Contact us today at (800) 975-4345 and let us know how we can help.