Morgan claws back nearly $1M from former advisers in arbitration
A broker kicked out of the industry for taking loans from clients without approval must pay his former firm over $480,000 under a FINRA arbitration award.
Morgan Stanley won damages, interest and legal fees from Jeffrey Hunter Smith over breaches of a promissory note and two back-end agreements, according to arbitration documents posted this week on the FINRA website. Smith’s total losses in the case amount to more than $483,000.
The panel’s ruling came nearly four months after the regulator barred Smith permanently. He took $300,000 in loans from Morgan Stanley clients without getting the firm’s required permission or disclosing the funds, Smith’s letter of acceptance, waiver and consent shows.
He omitted mention of the two loans from December 2011 and March 2012 in Morgan Stanley’s annual sales surveys, according to FINRA. He also failed to turn over his personal bank account statements upon request from FINRA’s department of enforcement, investigators said.
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‘PLEASED WITH THE AWARD’
Morgan Stanley filed its clawback claim against the Williamsburg, Virginia, broker in March 2015, two months after he resigned. An arbitration panel ruled Smith liable for the $306,000 promissory note and back-end agreements worth over $59,000.
The firm is “pleased with the award,” Morgan Stanley spokeswoman Christine Jockle wrote in an email.
Smith denied Morgan Stanley’s allegations in the arbitration case but did not show up for the Jan. 18 hearing, according to FINRA documents. He neither admitted nor denied FINRA’s findings under its separate investigation.
A lawyer who represented him before FINRA did not respond to email and phone requests for comment.
Smith was facing an internal review at the end of his six-year Morgan Stanley tenure, the disciplinary letter shows. The probe centered on his involvement with a relative’s trust held outside the firm and his wife’s beneficiary status on a client’s account, investigators said.
Smith worked for Wells Fargo Advisors from February 2015 to June 2016, according to his FINRA BrokerCheck entry. His lawyer informed investigators in July that he would not turn over his bank statements after nearly a year of requests to do so, the letter shows.
The regulator found Smith violated loan rules, as well as a guideline requiring “high standards of commercial honor and just and equitable principles of trade.” Morgan Stanley rules mandate prior written approval before borrowing money from a client who is not a family member.
Smith also failed to disclose within 30 days an October 2014 agreement he made with a credit card company to settle his outstanding balances, according to FINRA. Investigators said he didn’t file amended forms with the agency until February 2015.
The enforcement department began asking for Smith’s bank statements in June of that year. His permanent ban followed alerts from investigators that his refusal to provide the information threatened his active status in the industry.
Morgan Stanley also won clawbacks from two other former advisers with the firm, according to other awards posted to FINRA’s database Monday.
Former Potomac, Maryland broker Beverly B. Carroll must pay the wirehouse over $406,000 in damages, interest and legal fees. The parties filed for stipulated award arbitration in September after a settlement of Morgan Stanley’s claim that Carroll failed to pay a promissory note.
Carroll denied the firm’s allegations and filed a counterclaim in the case before the settlement.
The wirehouse also clawed back over $118,000 in damages, interest and legal fees from onetime Scottsdale, Arizona adviser Brian Richardson Castillo. Morgan Stanley had accused Castillo of breaches of three different promissory notes from 2009, 2010 and 2011.
Castillo never responded to the firm’s claim.