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