Morgan Stanley Penalized $7 Million for Failing to Adequately Supervise Brokers

According to the Associated Press, Morgan Stanley has agreed to pay more than $7 million to settle regulatory claims of misconduct, arising from the actions of two former brokers, Michael J. Kazacos and David M. Isabella. These brokers were employees of Morgan Stanley’s Rochester branch office.

It is said that the settlement resolves claims that Morgan Stanley failed to appropriately supervise these brokers, which allowed the brokers to allegedly mislead employees of Eastman Kodak Co. and Xerox Corp. into taking early retirement and investing retirement funds with them. The Financial Industry Regulatory Authority (FINRA) says that $3 million will serve as a fine for the alleged misconduct and the remaining $4.2 million will provide restitution to the 90 individuals who took early retirement in reliance on Morgan Stanley’s brokers’ advice.

A FINRA regulator says that in total at least 184 people were affected financially by the misconduct.  The regulator also stated that Morgan Stanley has settled with 101 individuals, besides the 90 mentioned above who will receive restitution.

According to WHEC-TV News 10, of Rochester, NY, one of the victims was Richard Patrick, who had worked at Kodak for 32 years before retiring early and accepting a retirement package.  Patrick says that he trusted Kazacos with $380,000 in 1998.  Kazacos had told Patrick that he would never lose the initial investment and that he could, in fact, draw 10% of his investment a year without invading the principal, Patrick says. However, by 2003, Patrick’s account held only $7000.

According to FINRA, Kazacos and Isabella made approximately $15.4 million in gross commissions during the time which the misconduct occurred. FINRA says that Kazacos has been permanently barred from the securities industry, pursuant to a settlement made by Kazacos with FINRA. As for Isabella, he has not settled with FINRA and a disciplinary complaint will be heard before a FINRA hearing panel.