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CFTC fines Morgan Stanley Smith Barney for supervision and records failures

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The US Commodity Futures Trading Commission (CFTC) has fined Morgan Stanley Smith Barney, a CFTC-registered futures commission merchant, for improper supervision and records violations. 

The CFTC order requires Morgan Stanley to pay a USD280,000 civil monetary penalty and to disgorge commissions it earned from the subject accounts in order to address its unlawful conduct.
 
Specifically, the CFTC order finds that Morgan Stanley failed to diligently supervise its officers’, employees’, and agents’ opening and handling of accounts held at Morgan Stanley in the name of a family of companies called SureInvestment. 
 
SureInvestment purported to operate a hedge fund based in part in the British Virgin Islands, deemed a “high risk jurisdiction” under Morgan Stanley’s compliance procedures. 
 
In light of this circumstance, the opening of these accounts was subject to special scrutiny pursuant to Morgan Stanley’s Enhanced Due Diligence and Customer Identification Program procedures.  These procedures required Morgan Stanley personnel to, among other things, “know its customer” and to be alert for any “red flags” regarding suspicious activity prior to opening an account.  The order finds that despite numerous red flags presented by SureInvestment’s account opening documents, including audits filled with typos and other suspicious irregularities for an entity that turned out not to exist, Morgan Stanley opened the accounts.
 
The order finds that these accounts were ultimately used by the owner of SureInvestment, Benjamin Wilson, to continue an ongoing USD35 million Ponzi scheme based in the UK.  Earlier this year, Wilson was sentenced to seven years imprisonment after pleading guilty to criminal charges brought by the UK Financial Conduct Authority.
 
“CFTC regulated firms, like Morgan Stanley, must adhere to rigorous internal controls, such as ‘know its customers’ controls, to protect customers and the markets from fraud and corruption,” says CFTC enforcement director Aitan Goelman.
 
The order also finds that Morgan Stanley failed to properly enforce its own trading limits assigned to the SureInvestment accounts, which resulted in initial margin requirements that far exceeded the applicable credit trading limit, failed to respond timely and accurately to a CFTC request for production of account records, and failed to maintain adequate records regarding the credit trading limit applicable to the SureInvestment accounts. 

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