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SECURITIES DTVISION
ADMINISTRATIVE PROCEEDING
NO. LS-12-0454
MORGAN STANLEY SMITH BARNEY LLC
RESPONDENT
CONSENT ORDER
State ("Divisjon"] has the authority to administer and enforce the provisions
ofthe
Mississippi Securities Act ("Aet"), Miss. Code Ann.55 75-71-101 etseq.; and
WHEREAS, Morgan Stanley Smith Barney LLC ("It
or 'BeSIe!!Le!!"J I is registered
as a
glgaDsadey"
or t}le
"EI!o"
tlnited
oftle Firm
1OD JuD. I, 2009, Morgan Stanlcy a.d Citigrodp .onFibutcd thc Global Wealtb Ma.ageftat
c.oDp of MorSan
Stanley & C6. Lcorponto4 [ow hoslr a! Moar Sianley & Co. Lrc, ad the SEitb Bamey Dvision of Citigroup
Global M.rkct! Inc., rActively, into Morgu StaDlcy Snith Bamey Lrc. Morgan Shrncy.ow owtrs, tbmugh ir!
subsidiarica, I 00% ofMorgan Stanly Snith B{mley LLC.
providing the Divisiol1 with access to facts re)ating to the investigation; and
\ITHEREAS, Moryan Star]ey has updated its policies and procedures governing
Custom Pordolio/Pordolio Management accounls, and has eDhaDccd its technology since
2008; and
tlis
matter witiout the expense and delay formal proceedings would involve; and
WHEREAT Morgan Star ey elects to permanently waive any right to a hearingand
"oIkI");
and
WHEREAS, Morgan Stanley, solely for the purpose of concluding this open
tle
cti ons
escri bed
h e
rei n,
tie
Order:
r.
1.
luRlsDtcTIoN
tle Act
and sale ofsecurities in Mississippi includingt}le firms and persons who offer and sell
2.
II,
3.
FINDINCS OF FACT
Lhe
worked in the Ridgeland, Mississippi branch offrce fcurrently ]ocated at 1018 Highland
Colony Parh^,ay, Ridgeland MississippiJ during December 2007 through June 2012.
4.
office starting in March 2007. As the IJranch Manager during the time in question,
Brister was responsible for supervising the flnancial advisors at Morgan Stanley's
Ridgeland O,'fice. Brister has recently retired from the Firm.
5.
Ridgeland Office. Brister also recrujted Wyatt's partner Hjlary Zimmerman and an
6.
investment accounts
as
between 2002 and 2007. wyatt and Zimmerman had a partnership and revenue sharing
affangement with regard to certain discretionary and non discretionary accounts
7.
from SmiLh Barney to Morgan Slanley. Morgan Stanley had a managed portfolio program
described as "Custom Portfoljo" ["!.P"J u,hich was simi]ar to the Smith Barney Portfolio
Management program. When Mr. Wyall joined Morgan Stanley ln 2007, Brister lvas not
a CP manager
received training and instnrctions on the CP program consjsting ofa conference call
with the
CP
CP
Firm. Mr. Brister also participated jn ongoing conFerence calls and trajning courses. Mr.
Brister became a CP manager in 2011-
a revenue
sharing
arrangement with regard to ccrta,n accounts that were transferred to Morgan stanley.
9.
when they jolned the Firm in December 2007, Wyatt atld Zimmerrnan
recerved substantial up-front money and executed promissory notes and bonus
agreements. Wyatt and Zimmerman were eligjble to receive additional promissory
rotes and bonus agreements based on their future production and assets under
manaSement.
10.
CP
program for former Smith Bamey customers which Wyatt would nranage Llsing his
stated strategy. These accounts were also referred to as \ /yatt Group accounts.
11.
new customer information was required to be entered into [4organ Stanley's system.
This information included customer investment obiectives, risk tolerances, financial and
other personal information used, in part, to aid in the determination ofwhether cerlain
investments and Wyatt's stated strategy were suitable for the customer. ln some
instances dudng the account opening process, customer information was entered that
w-as inaccurate. The inaccurate clrstomer
by the
!irm
at account opening although the Firm had systems in place to provide the
profile inforrnation to the customers lor them to revie\ , the information and correct any
inaccuracies,
L2.
As
part ofthe
CP
December 2007 in whjch he described his investment style, philosophy and process. At
times between 2009 to 2011, Wyatt did not follow lhe description of the process
described in this application. There were jnstances \
question how closely Wyatt was following his philosophy and process
13.
CP
Portfolios"). Most investors invested in the aggressive growth portfolio, which involved
very aggressive, short term trading wlth high turn_over and may havc bcen unsuitable
for investors with low risk tolerances. Some customers did not fully understand the risks
associated with the nature of WJ,att's trading strategy.
14.
CP
accounts. Zimmerman's role in the partnel-ship \ras to manage some olthe clienl
relationships and to attract new customers in the
15.
CP
program
Morgan Stanley's trading platform resulled in compliance issues and problems with his
trading acfivities prjmarily between 2009 to 2010. Wyatt's trading trigSered numerous
exception reports, which regularly flagged his CP accounts for review for items such as
turnover, ffade errors and trade adjustments, While the Firm took steps to assist Wyatt
and rectify these issues, it took some lime for Morgan Stanley to adequately address
16.
CP accounts.
tie
and other agents to tIe Complex Risk officer. Although thjs person was not a CP
manager, nor had she previously supervised a CP managel she received training and
instructions on the
reviewing the
CP
CP
CP
goup and
policies and procedures before Wyatt joined the Firm. She also
CP
77.
In early 2 009 as
CP
outreach to certain customers ofthe Firm that sustained losses in their managed
accounts, as well as certain customers invested in Wyatt's CP portfol,o. Morgan Stanley
may have contacted certain customers to confirm the suitabilify oftheir investments, to
verify that t}ley unde$tood the risks and losses in their accounts, and confirm that the
investments were consistentwith his or her financial situation and investment
obiectives. Several customers deny receiving any such outreach about their investments.
18.
tuanover alerts, erors, and adjusfnents. At times, Wyatt's supervisors expressed a need
to implement a plan ofaction to slow down his trading.
19.
During
0:t 0
personal issues. These concerns were escalated to Morgan Stanley's Human Resources
Department. During this time Wyatt's superyisors continued to document issues in his
accounts, including high turnover and trading through funds-on hand restrictions. The
Fr
20.
FINRA, Case No. 11-00932, alleging claims ofexcessive trading and unsuitable
investmenls.
21.
22.
FINR-A by
other Wyatt
Croup customers, FINM Case No. 12 00159 on lanuary 10, 2012 and FINM Case No
Case
Na 72 42257
included an allegation Wyatt had solicited customers, at times using his personal
email Iin vio]ation of Firm policy and Industry rules) to communicate un_monitored
by the Firnr u'ith customers to purchase unauthorized and unregistered securities
through a private placement. Morgan Stanley had been r.rnavrare ofsuch activity
i!
djd not inform the Firm of the alleged activjq/ described in the Statement of Claim
After learning about the outside private placement through t}Ie FINRr{ claim, Morgan
Stanley terminated Wyatt's employment on Jvne 22,2012. The U-5 and CRD stated
the reason for the termination was "for allegations relating to participatjon and
23.
24.
1.
2.
SS
75-71-101 to 701.
The Secretary of State has the authority under Section 604 of the Act
to
rules adopted thereunder and to impose a civil penalty for each violation
well
as seek an
violation
oftie
of the
Act as
Act Miss,
3.
impose discipliBary penalties on a person \,ir'ho has failed to reasonably supervise afi
agent, investment adviser representative, or other individual, ifthe agent investment
adviser or other indivjdual was subject to tIe person's supervision and committed a
-----
violation ofthjs chapter or the predecessor act or a rule adopted under this chapter or
the predecessor act $,ithin
4.
years.
Section 75-71-613 ofthe Act sels forth the maximum civil penalties
5.
prevent and detect any violations ofthe Act and rules promulgated thereunder."
See
Rule 5.19.
6.
7.
and appropriate
IV. ORDER
On the basis of the DivisioD's Findings of Fact and Conclusions of Law and Morgan
fte
sole purpose
of
1.
tiis
in this Consent 0rder in regard to the above matters. However, nothingherein limits the
ability ofthe Division, individually or joindy with other agencies, in pursuing any
investigation
witi
its agents.
2.
tle
previously referenced allegations against the Firm only and is not intended to be used
by the Firm or by the Division for any other purpose or by any other parties, The
Division has previously e[tered into consent orders with Wyatt and Brister. For any
person or entity nota party to this Order, this 0rder does not limit or create aDy private
rjghts or remedjes against Morgan Stanley or create liability for Morgan Stanley or limit
or create defenses ofMorgan Stanley to any claims.
3.
4.
The Firm shall cease and desist from fufther violations oft}te Act.
Respondent is hereby ordered to pay an administrative penalty in the
amount of$100,000 and to reimbu.se the Divjslon for its costs and expenses incured
in connec$on with the investigation in the amount of $400,000. Respondent shall pay
these amounts directly to the Division on or before
execution
oftiis Order.
days from
the Diyision, including reasonable attorney fees for the coilection ofthese amounts
upon defaulL
t0
5.
Customer Fund.
a.
investment account in the Wyatt Group Portfolios, and (bJ who has neither
litigated nor arbjtrated his or her claims to an award or other final
disposition, nor previously executed a release ofclaims by yirtue of
b.
{"IruSt!oa*")
days
from execution ofthis Order, Morgan Stanley shall deliver a check payable
to "Trustmark National Bank FBO Morgan Stanley Setdement Escrou/' in the
amount of $4,243,815.28, the full amount ofthe Customer Fund,
c.
In order to protect the personal finaDcial infomation ofthe individual ostohers, the paries agree that
ExhibitA to $e ertent it conrains personal identifiable information ofrhe cusromers shaltbe rsl cted from
public access, provided however that the partial reirbursemenramounts that do nor identif, rhe tdentity of
the customer are not restricred toom public access, as requiredby)aw.
ll
Morgan Stanley's timely receipt ofan Eljgible Customer's Release and any
documents required by the Release, Morgan Stanley shall direct
d.
Eligible Customer, Morgan Stanley shall have fully satisfied its obligations
to the Eligible Customer under this Order and shall have no further
e.
and does not dehver an executed Release and any documents required by
the Release on or before the Election Date Deadline, then such funds will
not be disbursed to the Eligible Customer and will revert to lhe Firm.
Trustmark shall deliver a check payable to Morgan Stanley after the
Election Date Deadline on a date agreeable to Morgan Stanley for the
amount that will revert to t}le Firm. To the extentany Eligible Customers
eligible for partial reimbursement under this Order cannot be located for
t2
tle
g.
Morgan Stanley will furnish a monthly report listing all notices to Eligible
Customers pursuant to this
ofthe Election Date Deadline by thirty (30) days after tle last
reimbursemenL
6.
Customers is appropriate and reasonable and the process described above is fair after
t3
7.
following requirements:
a.
b.
c.
l,
8.
of
the order.
9.
forth in this Order, tien the Division, at its sole discretion, upon fifteen [15] days'
notice, may seek to vacate this 0rder or enforce this Order as provided in Sections
liom any business that they otherwise are qualified or licensed to perform under
applicable state iaw.
10.
to any disqualifications contajned in the federal securities law, the rules and regulations
t4
se.uijtjes laws, including, but not limited to, statutory disqualification under Section
3[a][3 9] of the Securities Exchange Act of 1934. ln addilion, this Order is not intended
Lo
form the basis for any such disqualifications and, pursuant to Rule 506(d)[2)(iii.] and
Rule 262[b)[2], disqualiflcation under Rule 506[d)[1) and Rule 262[aJ under the
Securjties Act of 1933 should not arise as a consequence of this 0rder. This Order shall
nol disquaiify Morgan Stanlev frorn any business jt othe.wise is quaiificd to pcrlorm
under applicable law'
11.
ir'om relying upon the registration exemptions or regislration saFe harbor provisions that
may be contained in the federal securities laws, the rules and .egulations thereunder, lhe
12.
otherwise, which varies, alters, or adds to lhis 0rder; and this 0rder sr-tp-"rsedes
any
I3.
In the event one or more provisions contained in this Order shali for
invalidity, illegality, or unenforceabiliqy shall not affect any other provision of this
0rder.
15
14.
affirmatively represents it freely agrees to the signing of this 0rder by the Division, and
no threats, promises, representations, inducements, or offers of any kind, other than as
stated in this document, have been made by the IJivislon, any member ofthe stall ofthe
Division, or any agent or emlroyee ofthe Division in c.rnnecrion u.ith the negotiations
and signing
15.
well
as
ofthis 0rder.
This order shall be binding on the Firm and ils successors and assi8ns as
to successors and assigns of relevant afFiliates with rcspect to the conduct subject
16.
BY ORDER OF
C. DELBERT HOSEMANN, ]R,
MISSISSIPPI SECI{[1'ARY OF S'I'ATE
16
Morgan Stanley by and through its authodzed representatve states that no promlse
ofany kiDd or natLrre whatsoever that is not reflected in this Consent Orderwas made to
to iDduce it to enter into
tlis
Consent Order and that it has ehtered into dlis CoDseEt Order
voluntarily,
S,
"lt /)./<".
tiis
Byl
Tidel
Datei
for
oate' .l' I
lt
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