Morgan Stanley Fined $7M for Broker Misconduct

March 25, 2009 (PLANSPONSOR.com) - The Financial Industry Regulatory Authority (FINRA) announced that it has fined Morgan Stanley & Co. $3 million and ordered it to pay more than $4.2 million in restitution to resolve charges that its supervisory system failed to prevent brokers from violating FINRA rules on handling of IRA rollover/retirement accounts.

FINRA found that Morgan Stanley failed to reasonably supervise the activities of Michael J. Kazacos and David M. Isabella, two former registered representatives in its Rochester branch office, whom FINRA said persuaded Eastman Kodak Company and Xerox Corporation employees to take early retirement based upon unrealistic promises of consistently high investment returns and by espousing unsuitable investment strategies. The restitution will go to 90 Rochester, New York-area retirees, FINRA said.

FINRA has permanently barred Kazacos from the securities industry for committing numerous violations of FINRA rules in connection with his solicitation and handling of IRA rollover/retirement accounts, such as making unrealistic predictions that customers would earn investment returns of 10% each year, according to the announcement.

In a formal disciplinary complaint filed Wednesday, FINRA charged Isabella with engaging in similar misconduct, and the matter will be adjudicated before a three-member FINRA Hearing Panel. FINRA also found that Ira S. Miller, the manager of Morgan Stanley's Rochester branch, failed to reasonably supervise both representatives. He was fined $50,000, suspended from acting in a principal capacity for one year, and ordered to re-qualify as a principal before serving in such capacity in the future.

FINRA said at least 184 customers suffered financial hardships, including market losses, a reduction in principal, and the inability to sustain expected withdrawal rates. In many cases, according to the announcement, the customer's initial investment was eroded by market declines and the customer's monthly withdrawals were not funded by income but were really distributions of principal.

Some customers were forced to return to work at a greatly reduced income in order to meet their basic living expenses. Morgan Stanley has previously settled with 101 other customers of the two brokers.