September 15, 2014

CFTC Fines Morgan Stanley Smith Barney for Supervision and Records Failures Relating to Its “Know Its Customer” Procedures

CFTC also finds other supervisory failures relating to enforcement of imposed trading limits, responding timely and accurately to a CFTC document request, and maintaining adequate customer records

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against Morgan Stanley Smith Barney, LLC (Morgan Stanley), a CFTC-registered Futures Commission Merchant, for improper supervision and records violations. The CFTC Order requires Morgan Stanley to pay a $280,000 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 $35 million Ponzi scheme based in the United Kingdom. Earlier this year, Wilson was sentenced to seven years imprisonment after pleading guilty to criminal charges brought by the U.K. 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,” said CFTC Enforcement Director Aitan Goelman.

The Order also finds that Morgan Stanley (1) 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, (2) failed to respond timely and accurately to a CFTC request for production of account records, and (3) failed to maintain adequate records regarding the credit trading limit applicable to the SureInvestment accounts.

The CFTC Division of Enforcement staff members responsible for this case are Daniel Jordan, Michael Loconte, and Rick Glaser.

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Last Updated: September 15, 2014