The Commodity Futures Trading Commission has fined Morgan Stanley Smith Barney $280,000 for improper supervision and records violations related to “know your customer” procedures. The firm also agreed to disgorge commissions it earned from the subject accounts in order to address its unlawful conduct.
According to the CFTC, Morgan Stanley failed to diligently supervise the opening and handling of accounts held in the name of a family of companies called SureInvestment. Purported to operate a hedge fund based in part in the British Virgin Islands it was deemed a “high risk jurisdiction” under Morgan Stanley’s compliance procedures.
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 personnel to be alert for any red flags regarding suspicious activity prior to opening an account. Despite numerous red flags, including audits filled with typos and other suspicious irregularities for an entity that turned out not to exist, Morgan Stanley opened the accounts. The CFTC says these accounts were ultimately used by the owner of SureInvestment, Benjamin Wilson, to perpetuate 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 UK's Financial Conduct Authority.
The CFTC Order says 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 accounts.