In the Matter of Morgan Stanley Smith Barney LLC, Respondent (AWC 2014040051801, December 26, 2018).
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue,
Beginning in 2011, Morgan Stanley failed to develop and implement an anti-money laundering ("AML") program that was reasonably designed to achieve and monitor the Firm's compliance with the requirements of the Bank Secrecy Act ("BSA") and its implementing regulations. Specifically, the Firm failed to establish and implement policies and procedures that were reasonably expected to detect and cause the reporting of potentially suspicious activity in the following three respects:
- First, from January 2011 until at least April 2016, several of the systems that the Firm used to send and receive wire transfer information suffered from significant flaws. Specifically, those systems failed to transmit certain wire information to the Firm's automated AML surveillance system ("Transaction Monitoring System" or "TMS"), undermining that system's surveillance of tens of billions of dollars of wire and foreign currency transfers, including transfers to and from countries known for having high money laundering risk.
- Second, from January 2011 to December 2013, the Firm failed to devote sufficient resources to review alerts generated by the Firm's automated AML system, and as a result, the Firm's AML analysts often closed alerts without sufficiently conducting and/or documenting their investigations of the potentially suspicious wire transfers that generated the alerts.
- Third, from January 2011 to December 2013, the Firm's AML Department failed to reasonably monitor customers' deposits and trades of low-priced securities ("penny stock") for potential AML issues, including insider trading and market manipulations, despite the fact that the Firm's customers deposited approximately 2.7 billion shares of penny stock, which resulted in subsequent sales totaling approximately $164 million, in that time period.
By virtue of the foregoing, Morgan Stanley violated FINRA Rules 3310(a) and 2010.
In addition, from January 2011 to December 2013, Morgan Stanley failed to establish and maintain a supervisory system reasonably designed to achieve compliance with Section 5 of the Securities Act of 1933 ("Section 5") and applicable rules and regulations. Specifically, the Firm divided responsibility for vetting its customers' deposits and sales of penny stock among its branch management and its Compliance and Executive Financial Services ("EFS") departments without reasonable coordination among them. Instead, the Firm primarily relied on its customers' representations that the penny stock they sought to deposit was not restricted from sale, and the representations of issuers' counsel that the customers' sales complied with an exemption from the registration requirements. As a result, the Firm failed to reasonably evaluate the customers' penny stock transactions for red flags indicative of potential Section 5 violations. Based on the foregoing, Morgan Stanley violated NASD Rule 3010(a) and FINRA Rule 2010.
Finally, in 2012 and 2013, Morgan Stanley had in place but failed to implement its policies, procedures, and internal controls reasonably designed to achieve compliance with the BSA and its implementing regulations by failing to conduct risk-based reviews of the correspondent accounts of certain foreign financial institutions ("FFIs"), as required by the BSA and its implementing regulations and the Firm's policies and procedures. As a result, Morgan Stanley violated FINRA Rules 3310(b) and 2010.
Morgan Stanley has taken extraordinary steps and devoted substantial resources since 2013 to expand and enhance its AML policies and procedures, automated transaction monitoring system, and other AML-related programs. As part of this effort, the Firm invested substantial additional financial resources in those programs, and greatly increased its AML-related staffing. Among other steps taken to improve its programs, the Firm retained a third-party vendor, trained and vetted by the Firm, to conduct the initial reviews of all TMS-generated alerts. Additionally, the Firm developed and implemented new automated scenarios to surveil penny stock transactions and potential insider trading, and revised its policies, procedures, and controls related to pre-deposit and pre-sale reviews of penny stock. The Firm also self-reported relevant issues to the attention of FINRA staff.Accordingly, the sanctions imposed by this AWC reflect FINRA's consideration of these extraordinary corrective actions already taken by Morgan Stanley.
Daspin emails a great deal of unsolicited material to my office and to others at the Commission. Some of the emails are considered filings and portions require action by the presiding administrative law judge. On December 6, 2018, Daspin emailed to my office a "Reconsideration Motion declaration" (emphasis in original). The filing requests that I: (1) transfer this administrative proceeding to the federal district court in New Jersey; (2) recuse myself from presiding because I have a conflict of interest and am biased; and (3) stay the procedural schedule because Daspin cannot comply because he is ill, his wife is ill and needs his care, and he needs an attorney and he has no funds to hire one. Motion at 1, 4, 10-11; Response at 4. The Motion also contends that this administrative proceeding is unconstitutional and violates the Equal Protection Clause of the Constitution because if the decision is adverse, Daspin will not have an automatic right to appeal to the circuit court. Motion 4-5, 10.The Division of Enforcement filed an opposition on December 12, 2018, to the motion responding in detail to Daspin's contentions. In summary, the Division maintains that administrative law judges lack authority to move an administrative proceeding to the federal courts. See 17 C.F.R. § 201.111. The Division notes a lack of factual basis for Daspin's repetitive claim that I am biased against him and cites McLaughlin v. Union Oil Co. of California, 869 F.2d 1039, 1047 (7th Cir. 1989), for the proposition that an adverse ruling is almost never evidence of bias. See also Office of Inspector General, SEC, Final Report of Investigation, Case No. 15-ALJ-0482-I (Jan. 21, 2016), https://www.sec.gov/files/Final%20Report%20of%20Investigation.pdf. The Division points out that Daspin is factually incorrect regarding his appellate rights because a person subject to a final Commission order has a statutory right to obtain review of that order in the court of appeals. See 15 U.S.C. §§ 77i, 78y(a)(1).Daspin transmitted an additional email, declaration, and response on December 13, 2018.
RulingI DENY Daspin's motion and all requested relief. I will address each of Daspin's arguments in turn.I have no authority to transfer an administrative proceeding to federal district court. See 17 C.F.R. § 201.111; accord OIP at 15 (directing that a hearing take place before an administrative law judge, not a federal district court judge).Daspin has not identified any grounds for recusal other than my reassignment of the proceeding from one judge to another. See 17 C.F.R. § 201.112(b). Proceedings are reassigned to balance workloads and, on occasion, because of a judge's personal situation. The reassignment of this proceeding to me was caused by Commission order. See Pending Admin. Proc., 2018 SEC LEXIS 2264, at *1, *4.Finally, Daspin's arguments for an indefinite stay do not merit a delay of the proceeding; I have stated that I would work to accommodate his personal situation and will do so where Daspin can show good cause for doing so. See 17 C.F.R. § 201.161(b)(1); Prehr'g Tr. at 28-31 (Nov. 14, 2018).
This proceeding involves reporting violations by Nutriband, a development-stage Florida-based company, its CEO, Sheridan and its CFO, Melnik. From approximately July 2016 until May 2018, Respondents made misleading statements in the company's public filings concerning the jurisdiction of the Food and Drug Administration ("FDA") over Nutriband's products and failed to disclose that its products could not be lawfully marketed in the U.S. without FDA approval.
1. Nadel, age 68, is a resident of Upper Brookville, New York and from at least the beginning of 2007 through 2009 (the "Relevant Period") controlled a broker-dealer then registered with FINRA, Warren D. Nadel & Co. ("WDNC"), and an investment adviser then registered with the Commission, Registered Investment Advisers, LLC ("RIA"). During the Relevant Period, Nadel was an investment adviser, held Series 1, 3, 7, 24 and 63 licenses, and was at all relevant times the president, chief executive officer and chief compliance officer of WDNC, and the president of RIA. The registrations of both WDNC and RIA were terminated in 2011.2. On January 20, 2017 a final judgment was entered against Nadel, permanently enjoining him (1) from future violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1), 206(2) and 206(3) of the Advisers Act, and (2) from aiding and abetting any violations of Section 10(b) of the Exchange Act and Rule 10b-10 thereunder, in the civil action entitled Securities and Exchange Commission v. Warren D. Nadel, et al., Civil Action Number 2:11-CV0215, in the United States District Court for the Eastern District of New York.3. The Commission's complaint alleged that during the Relevant Period, Nadel fraudulently induced clients of RIA to invest tens of millions of dollars in what he falsely represented as a liquid, cash management investment program in which RIA clients would buy and sell preferred utility securities in the open market and hold them for short periods of time in order to generate either dividend income or capital appreciation (the "Strategy"). In reality, however, and contrary to Nadel's representations to clients, the Complaint alleged, the vast majority of the transactions in the Strategy consisted of cross-trades Nadel made between the advisory client accounts he controlled, at inflated prices Nadel made up himself. The Complaint alleged that through this fraudulent conduct, Nadel created the false impression that there was a liquid market for these securities and that the market prices for the securities were consistent with the inflated values that Nadel reported to RIA clients. The Complaint also alleged that in addition to the foregoing misrepesentations, Nadel also induced investors to join and stay in the Strategy by deliberately and materially overstating the amount of assets that RIA had under management. Through this fraudulent conduct, the Complaint alleged, Nadel obtained more than $8 million in commissions and advisory fees in the Relevant Period alone - and his clients, meanwhile, suffered substantial losses on what Nadel had falsely represented to be a liquid cash management program.4. On March 31, 2015, the Court granted the Commission's motion for partial summary judgment against Nadel, WDNC and RIA on its claims that they violated Section 10(b) of the Exchange Act and Rules 10b-5 and 10b-10 thereunder, Section 17(a) of the Securities Act, and Sections 206(1), 206(2) and 206(3) of the Advisers Act, and referred the question of remedies to the Magistrate Judge. On February 11, 2016, the Magistrate Judge, after having held a four-day hearing in July 2015, issued a Report and Recommendation recommending that (1) the Court order permanent injunctive relief against Nadel, WDNC and RIA; (2) the Court award disgorgement against them in the amount of $10,776,687.62, jointly and severally; (3) the the Court impose a third-tier civil penalty in the amount of $1,000,000 against Nadel; and (4) the Commission submit a revised prejudgment interest calculation. On September 9, 2016, the Court, over Defendants' objections, adopted the Magistrate Judge's Report and Recommendation. After approving the Commission's revised prejudgment interest calculation on September 23, 2016, the Court entered final judgments against Nadel, WDNC and RIA on January 20, 2017. In addition to the permanent injunctive relief described above in paragraph 2, supra, the Court also ordered: (1) a third-tier civil monetary penalty in the amount of $1,000,000 against Nadel; and (2) disgorgement against Nadel, WDNC and RIA, jointly and severally, in the amount of $10,776,687.62, plus prejudgment interest in the amount of $2,293,701.57, for a total of $13,070,389.19.
In regards to Occurrence Number 306630, the customer approached Claimant to open an account with the express purpose of purchasing IC Stock, as well as other investments in 1996. The customer purchased a substantial amount of IC Stock. In 1997, the value of the IC Stock fell substantially, essentially wiping out its value. The customer filed a complaint with NASD in 1999. The customer states that he had not initially sought to file a complaint, but later did so at the urging of another broker who he had been consulting with.In regards to Occurrence Number 307529, the customer approached Claimant to open an account with the express purpose of purchasing IC Stock. The customer purchased IC Stock and made some other investments. In 1997, the value of the IC stock fell substantially, essentially wiping out its value. The customer filed a complaint with NASD in 2000.Claimant gave extensive, credible and detailed testimony, which is backed up, at least in part, by the exhibits submitted, that he not only did NOT recommend the investments in IC Stock, but that he explained to both customers, in detail, that this was an extremely risky and speculative stock. Claimant also testified that he told the customers that because this was a risky Mexican mining company being traded on the Toronto exchange his employer at the time did NOT follow the stock and would not be able to give them any analysis of the stock. In addition, the trades are all noted as "unsolicited".Based upon all of the above, I find that there is strong and convincing evidence that Claimant did not recommend the investment to the customers, but that he simply executed a purchase that was requested and, in fact, warned the customers as to the risk involved. As such, the complaints are without merit and are untrue. Therefore, it is not to the public benefit that these complaints remain on Claimant's CRD and I recommend that they be removed.