New Hampshire securities regulators are suing Morgan Stanley, charging that in 2002 the firm encouraged its brokers to sell proprietary mutual funds by using sales contests, a violation of NASD rules.
In addition to allowing the contests, the firm failed to adequately supervise its New Hampshire brokers by allowing improper trading, by not adequately “blue skying” securities sales and by failing to devise a compliance system that would have stopped the violations of firm policy, the state regulators said.
One of the alleged violations involved “steak-a-thons,” in which brokers were rewarded with raw meat for selling Morgan funds. State investigators found at least 35 instances of steak rewards for sales of proprietary funds. In the contests, brokers who sold $10,000 of firm funds would receive one steak. $30,000 reaped a rep two steaks and more than $100,000, three. The state says the brokers were also given instructions not to communicate about the contests in writing, thus keeping customers unaware of their existence.
The state also claims a broker at the Manchester, N.H., branch on several occasions executed “stock trades that were unsuitable, unregistered and nonexempt,” and in violation of firm policy and procedure. Morgan Stanley management, for its part, allowed the behavior to continue, says the state.
Andrea Slattery, a spokesperson for Morgan Stanley, said the sales contests were addressed with the NASD last year and the broker involved in the improper trading in the Manchester office was terminated more than three years ago.
Mark Connolly, the deputy secretary of state for New Hampshire, and the director of the bureau of securities, is demanding that Morgan Stanley pay a $500,000 administrative fine as well as show cause why its license should not be suspended or revoked. The firm must also pay for the cost of the state’s investigation and hire an independent consultant to review existing compliance procedures in Morgan Stanley’s New Hampshire branch offices.
In September, the NASD censured and fined Morgan Stanley $2 million for rewarding brokers in 29 instances with spa vacations, tickets to the NBA Finals and Rolling Stones and Britney Spears concerts. In a statement regarding the fine, Robert Glauber, the head of the NASD, said he was most troubled by the fact that the firm had no preventative measures in place.
The firm also paid a $50 million fine to the SEC in November 2003 to settle charges that it pushed investors into preferred funds that netted larger commissions. The firm didn’t admit or deny wrongdoing but did issue an apology to customers after the settlement.
Massachusetts regulators also sued the firm in August 2003. In that suit, Secretary of State William Galvin’s investigation found that the firm’s aggressive sales of its funds had earned it between $5 million and $8 million in commissions and fees since the beginning of 2003. And, according to Morningstar data, performance was not the driver of sales—60 percent of Morgan Stanley funds posted below average returns over a three-year period ending June 30, 2003. The Massachusetts suit is still pending.