Morgan Stanley

FINRA Sanctions Sylvester King Jr. Over Improper Loans and Private Securities Transactions

August 24, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned (Case No. 2013036262101) broker Sylvester King Jr. (King) concerning allegations that from July 2009, through November 2012, while King was registered Morgan Stanley Smith Barney LLC (Morgan Stanley) and later Wells Fargo Advisors, LLC (Wells Fargo), circumvented Wells Fargo’s policies and procedures by assisting another broker in concealing nearly $400,000 in loans to three firm customers, loaned $25,000 to a customer without permission, participated in an undisclosed private securities transaction, otherwise referred to in the industry as “selling away”, where eight customers invested more than $3 million, and provided false information to Morgan Stanley on two separate questionnaires.

King entered the securities industry in 1999. From 2006, until June 2009, King was registered with Citigroup Global Markets Inc. (Citigroup). From June 2009, until October 2010, King was associated with Morgan Stanley. Thereafter, from October 2011, until May 2015, King was associated with brokerage firm Wells Fargo. On April 27, 2015, Wells Fargo filed a notice of Termination Form U-5 on the same day that FINRA entered into its agreement with King in which King accepted a fine and sanctions stating that King was discharged from the firm because of the settlement with FINRA which included an 18 month suspension. Thereafter, FINRA filed a second regulatory action stating that King failed to pay the $35,000 required as part of the settlement as of July 28, 2015.

FINRA alleged that in 2009, King and his partner referred to by the initials “AP”, formed PKG, a d/b/a branch office located in Florida registered through Morgan Stanley and then Wells Fargo. PKG allegedly provided financial “concierge” services to professional athletes who played in the NFL and the NBA. FINRA alleged that King committed the violations contained in the complaint for the supposed benefit, of several of these athletes.

Broker Investigation: Churning Claims Against Mark Kaplan

August 19, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker Mark Kaplan (Kaplan) has been the subject of at least four customer complaints and one termination. The customer complaints against Kaplan allege a number of securities law violations including that the broker made unsuitable investments, churning (excessive trading), unauthorized trading, breach of fiduciary duty, misrepresentations and false statements, among other claims

Kaplan entered the securities industry in 1989. From September 2005, until June 2009, Kaplan was registered with Citigroup Global Markets Inc. (Citigroup). From June 2009, until April 2011, Kaplan was associated with Morgan Stanley Smith Barney (Morgan Stanley). In March 2011, Morgan Stanley filed a notice of Termination Form U-5 stating that Kaplan was discharged because of a customer complaint that was made against Kaplan. The firm also stated that it had other concerns regarding activity in client accounts. In response, Kaplan stated that the allegations by Morgan Stanley were unfounded and that the firm had approved all of the activity in client accounts. Since March 2011, Kaplan has been associated with Vanderbilt Securities, LLC.

All advisers have a fundamental responsibility to deal fairly with investors including making suitable investment recommendations. Many of the claims against Kaplan involving claims of churning and excessive trading. When brokers engage in churning the investment trading activity in the client’s account serves no reasonable purpose for the investor and is transacted to profit the broker through the generation of commission payments. The elements to establish a churning claim, which is considered a species of securities fraud, are excessive transactions of securities, broker control over the account, and intent to defraud the investor by obtaining unlawful commissions. A similar claim, excessive trading, under FINRA’s suitability rule involves just the first two elements. Certain commonly used measures and ratios used to determine churning help evaluate a churning claim. These ratios look at how frequently the account is turned over plus whether or not the expenses incurred in the account made it unreasonable that the investor could reasonably profit from the activity.

Broker Spotlight: Citigroup Broker David Honingstock

August 18, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker David Honingstock (Honingstock) has been the subject of at least two customer complaints, two financial disclosures, and three judgments and/or liens. The customer complaints against Honingstock allege a number of securities law violations including that the broker made unsuitable investments, breach of fiduciary duty, misrepresentations and false statements, among other claims

In addition to these claims, Honingstock declared bankruptcy in October 2014 in New York. In addition, Honingstock former brokerage firm, Morgan Stanley, initiated an action against the broker alleging a debt of $1,635,123 owed to the firm that in a compromise settlement was reduced to $218,000. Honingstock has several other debts listed on his disclosures including a hospital bill from 2013, and a New York State Tax lien for over $17,000. A broker’s inability to manage his own finances or having trouble making ends meet may suffer from potential conflicts of interests in making recommendations to his clients.

Honingstock entered the securities industry in 1986. From January 2003, until May 2007, Honingstock was registered with UBS Financial Services, Inc. (UBS). Upon leaving from UBS, from May 2007, through June 2009, Honingstock was associated with Citigroup Global Markets Inc. (Citigroup). From there, Honingstock was associated with Morgan Stanley Smith Barney form June 2009, until December 2009. Finally, Honingstock has been registered with Citigroup since 2013.

FINRA Bars Former Morgan Stanley Advisor Justin Amaral

August 13, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker Justin Amaral (Amaral) has been barred for failing to respond to requests for information by the agency. The requests may have related to the reasons Morgan Stanley gave for terminating Amaral’s employment. Upon termination from Morgan Stanley the firm filed a Uniform Termination form (Form U5) stating that the reason for the firm’s termination of Amaral was due to allegations by the firm that Amaral became an executor and beneficiary in a client’s estate and that he used discretionary authority in several client accounts.

In addition, to the most recent FINRA action and bar, Amaral has been the subject of at least two customer complaints involving unsuitable closed-end funds and misrepresentations of investments involving mutual funds. According to FINRA, the agency made attempts to have Amaral appear for testimony concerning an unstated matter. Amaral failed to appear and was consequently barred from the securities industry.

It is important for investors to know that all advisers have an obligation and responsibility to deal fairly with investors including making suitable investment recommendations. In order to make suitable recommendations the broker must have a reasonable basis for recommending the product or security based upon the broker’s investigation of the investments properties including its benefits, risks, tax consequences, and other relevant factors. In addition, the broker must also understand the customer’s specific investment objectives to determine whether or not the specific product or security being recommended is appropriate for the customer based upon their needs.

SEC Charged 36 Brokerage Firms Over Municipal Bond Offerings

August 12, 2015 | by Staff Attorney

The Securities and Exchange Commission (SEC) announced enforcement actions against 36 municipal bond underwriting brokerage firms for material misstatements and omissions in municipal bond offering documents. The SEC offered favorable settlement terms to municipal bond underwriters and issuers who self-reported securities law violations leading to the settlements.

The SEC alleged that between 2010 and 2014, 36 brokerage and financial firms violated federal securities laws by selling municipal bonds using offering documents that contained materially false statements or omissions about the bond issuers’ compliance with their obligation to disclosure. The firms were also alleged by the SEC to have failed to conduct adequate due diligence to identify the misstatements and omissions before offering and selling the bonds to their customers.

The municipal bond market is a $3.7 trillion market. Continuing disclosure provides municipal bond investors with information about the solvency and financial fitness of issuers on an ongoing basis. The SEC had previously identified issuers’ failure to comply with their continuing disclosure obligations as being a major challenge for investors seeking up to date information about their municipal bond holdings.

FINRA Sanctions Morgan Stanley and Scottrade for Failing to Supervise Customer Transfers to Third-Party Accounts

August 9, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) issued a press release concerning two settlements fining Morgan Stanley Smith Barney, LLC (Morgan Stanley) $650,000 and Scottrade, Inc. $300,000 for failing to implement reasonable supervisory systems to monitor the transmittal of customer funds to third-party accounts. The settlements included allegations that both firms had weak supervisory systems after FINRA examination teams reviewed the firms in 2011, but neither took necessary steps to correct the supervisory gaps.

Brad Bennett, Executive Vice President and Chief of Enforcement, was quoted in the press release as stating that, “Firms must have robust supervisory systems to monitor and protect the movement of customer funds. Morgan Stanley and Scottrade had been alerted to significant gaps in their systems by FINRA staff, yet years went by before either firm implemented sufficient corrective measures.”

In the Morgan Stanley settlement, FINRA alleged that from October 2008, to June 2013, three Morgan Stanley brokers in two different branch offices converted a total of $494,400 from thirteen customers by creating fraudulent wire transfer orders and checks to third-party accounts. In one example, the brokers moved funds from multiple customer accounts to their own personal bank accounts. FINRA found that in these instances Morgan Stanley’s supervisory systems and procedures to review and monitor transmittals of customer funds through wire transfers were not reasonable and could not detect multiple customer account transfers to the same third-party accounts and outside entities. In sum, FINRA found that the supervisory failures allowed the conversions to go undetected.

Former Morgan Stanley Broker Debra Lyman Sanctioned Over Unauthorized Trading

July 23, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) fined and suspended broker Debra Lyman (Lyman) concerning allegations that between January 2013 through November 2013 Lyman engaged in unauthorized or discretionary trading in six client accounts without proper written permission.

Lyman was associated with Morgan Stanley from 1998 , through January 17, 2014. Respondent was terminated by the firm for exercising discretion in client accounts without obtaining written authorization. In addition to the FINRA complaint, Lyman has been the subject of at least five customer complaints, the majority of which complain of high commissions and fees associated with unauthorized and excessive trading activity, commonly known and referred to as churning.

NASD Conduct Rule 2510(b) prohibits brokers from exercising discretionary power in a customer’s account unless such customer has given prior written authorization to the broker and the brokerage firm has accepted the account as discretionary. FINRA alleged that from January through November 2013, Lyman effected discretionary transactions in at least six customer accounts without obtaining prior written authorization from the customers and without the accounts being accepted as discretionary by Morgan Stanley.

Broker Michael Gates Alleged to Have Made Unauthorized Trades in Client Accounts

June 17, 2015 | by Staff Attorney

According to broker Michael Gates (Gates) Financial Industry Regulatory Authority (FINRA) BrokerCheck records the representative was recently sanctioned concerning allegations that from January 2011, through October 2011, he effected approximately 22 discretionary transactions for two firm customers without written authorization from the customers or approval from the firm.

Gates first entered the securities industry in September 1997. Thereafter, in April 2004, Gates became registered with Wells Fargo Advisors, LLC (Wells Fargo). In March 2012, Wells Fargo terminated Gates alleging that the broker may have entered mutual fund sales without authorization of his clients. After termination of his registration with Wells Fargo, Gates became registered with Morgan Stanley where he is currently registered. In addition, at least two customers have filed complaints against Gates alleging unsuitable investments, and excessive trading (churning).

NASD Rule 2510 prohibits brokers from exercising any discretionary power in a customer’s account unless there is written authorization and the account has been accepted by the member. FINRA alleged that Gates was not approved by his firm to exercise discretion in the customers accounts but nonetheless effected 22 discretionary transactions for two customers.

Morgan Stanley and Broker Ami Forte Subject to $400 Million Investor Complaint

June 8, 2015 | by Staff Attorney

According to InvestmentNews, the widow of Roy M. Speer, co-founder of the Home Shopping Network, has filed a complaint with The Financial Industry Regulatory Authority (FINRA) against Morgan Stanley Wealth Management along with an adviser Ami Forte (Forte) and branch manager Terry McCoy (McCoy) for $400 million. Morgan Stanley acknowledged the arbitration claim in a disclosure in the brokerage’s publicly filed annual financial report but only indicated the amount in controversy was for more than $170 million.

Mr. Speer’s widow is claiming that Morgan Stanley and their adviser engaged in excessive trading – also referred to as churning, unauthorized use of discretion, and abused their fiduciary duty. According to the complaint, Mr. Speer suffered from diminished capacity during the last five years of his life. During this time his adviser and others at the firm made approximately 12,000 unauthorized trades generating an eye popping $40 million in commissions.

Unfortunately, cases such as these are becoming increasingly common. Our firm has handled a number of cases where a wealthy investor has been taken advantage of due to diminished capacity. In other cases a spouse who inherits or assumes management over an affluent estate has very little financial experience and places their trust in their brokerage firm and financial advisor only to be charged millions in fees and high commission products. Often times these financial strategies are completely unreasonable and unjustifiable. Wealthy investors often have financial needs that do not exceed even a tiny fraction of their overall net worth. Yet, there have been cases where brokers place sizable portions of their client’s massive estates at jeopardy in order to generate millions in fees while providing absolutely no benefit for their client.

Wells Fargo Broker Aaron Parthemer Barred Over Private Securities Sales

May 19, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) barred broker Aaron Parthemer (Parthemer) concerning allegations that Parthemer engaged in private securities transactions – also known as “selling away.” FINRA alleged that from June 2009, through March 2013, Parthemer engaged in several undisclosed outside business activities, loaned nearly $400,000 to three firm customers without permission from his firm, presented an undisclosed private securities transaction through which eight firm customers invested more than $3 million, and provided false information and false documents to Morgan Stanley, Wells Fargo, and FINRA.

In October 1994 Parthemer first became registered with FINRA firm. From June 2009, through October 21, 2011, he was registered through Morgan Stanley Smith Barney LLC (Morgan Stanley). On November 4, 2011, Morgan Stanley filed a filed a termination notice stating that Parthemer’s termination from the firm was voluntary. From October 21, 2011, until May 2015, Parthemer was registered with Wells Fargo Advisors, LLC (Wells Fargo).

FINRA found that from approximately July 2009, through February 2012, Parthemer participated in a private securities transaction regarding a company referred to by the initials “GVC”, a startup internet branding company managed by a friend of Parthemers referred to by the initials “GH”. FINRA alleged that Parthemer referred several of his NFL and NBA clients to his friend for the purpose of investing in GVC. Subsequently, approximately eight of Parthemer’s clients purchased approximately $3.08 million of preferred GVC stock. FINRA found that Parthemer facilitated the transactions by hosting a presentation for investors conducted by GH at Parthemer’s home, sending PowerPoint presentations and other information concerning GVC to potential investors, and forwarding and retrieving required documentation to and from investors.