Morgan Stanley must pay $182,500 in restitution to four Massachusetts investors after one of the firm’s broker/dealers frequently made trades in an attempt to boost his commission fees, according to Massachusetts Secretary of the Commonwealth William Galvin.
The Securities Division filed a consent order today against Morgan Stanley, asserting that supervisors of the accused broker failed to catch his churning of trades even though the wirehouse had procedures in place demanding trades be monitored for potential instances of churning.
“I am very pleased that we were able to get these Massachusetts investors all of their money back, but this case shows the need for close supervision of agents,” Galvin said. “It is not sufficient for supervisors to monitor agents for red flags, they also need to act on those red flags immediately, in order to protect investors.”
According to the order, there were multiple alerts on the trades being made by the Boston-based broker Justin E. Amaral (who was registered from August 2001 until May 2014) that used turnover ratios and cost-to-equity ratios to discern the possibility of churning. According to the order, Amaral received at least 97 alerts between January 2010 and May 2014. However, most of these alerts were closed without further investigation after Amaral explained away the high number of trades as resulting from account rebalancing or substandard market performance.
According to the order, Morgan Stanley did not even open an investigation into Amaral until April 15, 2014, when a customer’s accountant filed a complaint. The accountant told Morgan Stanley that Amaral was the executor of a customer’s estate and was even included as a beneficiary in the customer’s will; the wirehouse was not informed of this relationship, according to the order. According to the order, Amaral resigned from Morgan Stanley before the start of an investigative interview several weeks later, on May 1. The internal investigation revealed "numerous issues" with Amaral's trades, according to the order.
Galvin also announced that Morgan Stanley would pay $200,000 in administrative fines, in addition to the restitution penalty, and the state’s Securities Division will also censure the firm. Morgan Stanley submitted to the settlement without admitting or denying the claims.
Galvin is regarded as a staunch advocate for investor protections and critic of malfeasance in the industry; earlier this year, Galvin’s Securities Division fined LPL Financial $1.1. million and Wells Fargo $450,000 for failing to register advisors in Massachusetts.
This June, Galvin also announced the formation of a public comment period for a potential fiduciary rule for the state, making it one of the leading state actors attempting to fill the perceived regulatory gaps in the SEC’s Regulation Best Interest rule.