DOW JONES NEWSWIRES
Morgan Stanley (MS) will pay $7.2 million to resolve charges its
supervisory system failed to prevent brokers from persuading
Eastman Kodak Co. (EK) and Xerox Corp. (XRX) employees to take
early retirement based upon unrealistic promises of high investment
returns, the Financial Industry Regulatory Authority said
Wednesday.
Finra said at least 184 customers suffered financial hardships,
including market losses, as a result of the misconduct.
The investment bank will pay a $3 million fine and more than
$4.2 million in restitution to 90 Rochester, N.Y., area retirees.
The firm has previously settled with 101 other customers.
Finra said Morgan Stanley didn't reasonably supervise the
activities of Michael J. Kazacos and David M. Isabella, two former
registered representatives in its Rochester office. Kazacos has
been permanently barred from the securities industry in connection
with his solicitation and handling of IRA rollover/retirement
accounts. Isabella has been charged with engaging in similar
misconduct.
The manager of Morgan Stanley's Rochester branch, Ira S. Miller,
was also fined $50,000 and suspended from acting in a principal
capacity for one year.
"Brokerage firms and brokers who serve investors considering
retirement must ensure that their customers are given suitable
investment recommendations based upon reasonable assumptions of
market performance and are given thorough disclosure of investment
risks," said Finra's enforcement chief, Susan L. Merrill. "The
supervisory failures of Morgan Stanley and its management led to
losses suffered by customers at a vulnerable time in their lives -
retirement - which could have been avoided."
In many cases, the customer's initial investment was eroded by
market declines and the customer's monthly withdrawals weren't
funded by income but were really distributions of principal, Finra
alleged. Some customers were forced to return to work at a reduced
income to meet their basic living expenses.
"Morgan Stanley cooperated fully with Finra's investigation of
this matter and is pleased that a settlement has been reached," a
spokeswoman said. "The firm takes its supervisory obligations
seriously and has enhanced its supervisory policies and procedures
since the conduct at issue occurred a number of years ago. The two
financial advisors whose conduct was the subject of the
investigation are no longer employed by the firm."
Specifically, Finra found Kazacos persuaded potential retirees
to invest their retirement assets with him from 1998 through 2003
by claiming they would earn 10% returns each year and would be able
to satisfy their income needs by withdrawing a similar percentage
for living expenses without reducing their principal. Kazacos also
encouraged several individuals to move their retirement accounts to
Morgan Stanley, with some deciding to retire sooner than they
otherwise might have.
During that time period, Kazacos and Isabella generated about
$15.4 million in gross commissions. In settling the matters, Morgan
Stanley, Kazacos and Miller neither admitted nor denied the
findings, but consented to their entry.
-By Lauren Pollock, Dow Jones Newswires; 201-938-5964;
lauren.pollock@dowjones.com