Heavily Recruited Mississippi Broker Costs Morgan Stanley $4.7 Million
Morgan Stanley has agreed to pay $4.7 million to settle charges it failed to supervise a Ridgeland, Mississippi, broker whose aggressive trading strategies generated numerous alerts that did not lead to heightened oversight of his managed accounts, according to the Mississippi Secretary of State’s securities division.
The broker’s branch manager separately agreed to turn in his state securities license and to “permanently retire” from the industry this month after a 31-year career.
The penalties were spurred by “very aggressive” and unsuitable trades made over four-and-a-half year by Steven M. Wyatt that created “inordinate losses” for clients, some of whom did not understand the risks and whose risk tolerance Wyatt inaccurately recorded, according to a consent order the state published on Tuesday.
The sanctions highlight state and federal regulator’s renewed scrutiny of complaints against brokers who are heavily recruited to bring customer assets with them to new firms.
Wyatt managed an aggressive growth portfolio in a managed account program that had “generated high returns for customers, particularly between 2002 and 2007” when he was with Smith Barney, and was paid “substantial upfront money” and promissory note bonuses when he was hired in December 2007 by branch manager Fred E. Brister, III, according to the settlement.
Brister, who had joined Morgan Stanley earlier that year from Stifel, Nicolaus, had not previously supervised a manager in the so-called Custom Portfolio program, according to the settlement. He received training and instructions consisting of a conference call with the CP group and a review of policies and procedures in preparation for the arrival of Wyatt and a partner, it said.
Morgan Stanley fired Wyatt in June 2012 for investing in a medical device company in his wife’s name to circumvent its oversight and recommending that clients buy private securities in the firm. The Financial Industry Regulatory Authority subsequently suspended him for four months over the same allegations.
Wyatt, who neither admitted nor denied the Finra allegations, is not currently registered as a broker and could not be reached for comment. George Freeman, a lawyer who had represented Wyatt in a 2012 dispute that cost Morgan Stanley $2.5 million, did not respond to a call for comment.
“The settlement focuses mainly on losses incurred nearly eight years ago during a period of violent market decline by clients in the Ridgeland, Mississippi, branch who invested in discretionary aggressive growth or growth portfolios,” Morgan Stanley spokeswoman Christine Jockle wrote in an e-mail.
Under the Mississippi consent order, the firm was ordered to pay $4.2 million in restitution to 213 investors in 15 states and another $500,000 in penalties and costs to Mississippi’s securities division for its multi-year investigation. The state agency, which said disgruntled customers prompted the probe, also imposed a permanent bar on Wyatt’s securities industry employment in the state.
“Mississippians work too hard for their savings to be lost from these types of reckless activities,” Mississippi Secretary of State Delbert Hosemann said in a prepared statement.
Morgan Stanley, which neither admitted nor denied the allegations, cooperated with the investigation and has updated its policies and procedures for supervising its “Custom Portfolio” managed accounts, according to the settlement.
Wyatt’s trading generated frequent exception reports regarding high turnover, errors and trade adjustments starting in 2009. Although supervisors “expressed a need to implement a plan of action to slow down his trading,” Morgan Stanley never put Wyatt on heightened supervision, according to the settlement. The firm’s only disciplinary action prior to his firing was a reprimand in December 2011 for making trades in a non-discretionary account without a customer’s permission.
Wyatt’s BrokerCheck report lists 10 disputes filed by customers since 2010, six of which resulted in total damage awards of $1.4 million that Morgan Stanley paid. Three other customer claims of $1 million or higher were settled and another seeking $1 million for alleged unauthorized trading and unsuitable purchases is pending, according to BrokerCheck data.
Brister, who agreed with MIssissippi to give up his securities license as part of his “permanent retirement” from the industry, accumulated nine failure-to-supervise customer complaints on his BrokerCheck report over his nine-year stint at Morgan Stanley.
The veteran manager, who began his career in 1975 at T. J. Raney and also has worked at Dean Witter Reynolds, Pru-Bache and Sterne Agee & Leach, could not be reached for comment.