Morgan Stanley neglected warnings on broker

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(Last Updated On: August 22, 2016)

A troubling call came in to Morgan Stanley’s internal hotline in May 2010.

One of the company’s top financial advisers in Mississippi, Steve Wyatt, was struggling with medications and was “not sleeping, coming in 3 and 4 a.m.,” his assistant said on the call, according to notes taken by the person who answered the phone. Wyatt, a broker, was also trading client money “erratically,” the assistant said.

Morgan Stanley is one of the top banks on Wall Street, operating one of the most sophisticated financial advisory businesses in the world. But when the call came in, there was little effort to help fix the problems, Wyatt’s colleagues — and Wyatt himself — testified in arbitration.

This was not the only time Morgan Stanley did not heed warnings about Wyatt, who managed tens of millions of dollars of customer money, according to a settlement this week and documents from arbitration cases against him and the company.

Problematic behaviour

During Mr. Wyatt’s five years at the company, supervisors and compliance officers noted his problematic behaviour and business patterns many times and failed to step in, documents show. Lawyers for his former clients claim that they lost about half their money, or around $50 million.

Mr. Wyatt’s case, while involving just one broker, sheds light on the difficulty that even sophisticated companies can encounter in supervising their far-flung networks of brokers, who manage the retirement savings of millions of people nationwide.

Wall Street companies have been expanding into wealth management and brokerage services, as profits from other businesses have been under pressure from regulations imposed after the 2008 financial crisis. Morgan Stanley now has nearly 16,000 financial advisers, one of the largest such forces of any company.

Mr. Wyatt, who oversaw more than $100 million in client money, was fired in 2012, more than two years after that phone call and after more concerns were raised.

In an interview, Mr. Wyatt, now 44, described falling into depression and having suicidal feelings, set off by the chaos of financial crisis and its aftermath.

He said his supervisors never offered help or expressed concern. “If they thought I was suicidal, if they thought I was depressed, nobody mentioned anything to me — concerned or otherwise,” he said.

This week, the Mississippi secretary of state said in a settlement with Morgan Stanley that it had “failed to reasonably supervise” Mr. Wyatt. “Clearly, they had warning signs — they had indications of personal issues,” Delbert Hosemann, the Mississippi secretary of state, said of Morgan Stanley. “All of those were either dealt with in a cursory manner or not dealt with at all.”

The settlement barred Mr. Wyatt and his immediate supervisor from the securities industry for life. Morgan Stanley was also instructed to create a $4.2 million fund to reimburse clients, a small part of what customers claim they lost with Mr. Wyatt.

Morgan Stanley did not admit or deny the accusations in the state settlement.

The company is fighting dozens of Mr. Wyatt’s former clients in arbitration. It has said in legal documents that the clients were “negligent” for not following Mr. Wyatt more closely.

In the three arbitration cases that have been decided so far, Morgan Stanley has had to pay about $3 million.

James Wiggins, a spokesman for the company, said this week that many of Mr. Wyatt’s losses had resulted largely from the turmoil caused by the financial crisis.

“We take extremely seriously our responsibility for placing our clients’ interest first,” Mr. Wiggins said.

The state settlement provides few details about the behaviour that got Mr. Wyatt and Morgan Stanley into trouble. But closed testimony and thousands of pages of documents from the arbitration cases reviewed by The New York Times shed light on how the matter played out at the company.

‘A Pile of Money’

When Mr. Wyatt was brought to Morgan Stanley in 2007 by Fred Brister, the manager of the Ridgeland, Mississippi, branch, there were no black marks on his regulatory record from more than a decade at Smith Barney. Jessica Clarke, one of Mr. Wyatt’s customers at Morgan Stanley, said he was a gregarious salesman who won her account with his confidence.

A “boy genius,” Clarke, 84, said. “I will make you a pile of money,” he wrote in an email to another client in 2007. “It ain’t gonna be easy and it may seem unorthodox at times but stay with me and do what I say.”

The evidence now being used against Mr. Wyatt in arbitration began to pile up soon after he joined Morgan Stanley.

In his first year, he took the money in some of his clients’ accounts and put it in just two stocks — BlackBerry, the cellphone maker, and Valence, a battery maker that later went bankrupt. Four clients who went to arbitration last year saw their investments in both stocks fall more than 60 per cent, according to their records.

Morgan Stanley has said in legal documents that those stock trades were made in accounts that customers controlled.

The customers said Mr. Wyatt rarely consulted them before trading and did not ask for approval on the big holdings of BlackBerry and Valence — behaviour the Mississippi secretary of state also noted.

Less than a year after Mr. Wyatt arrived, the Morgan Stanley risk officer in the Mississippi branch had made a handwritten list of “Triggers on Steve” with 10 problems, including trade errors, high fees and significant losses.

Fran Finch, another broker in the office, merged some of her clients with Mr. Wyatt’s when he joined Morgan Stanley, because of his apparent success in bringing in revenue.

But she testified that in 2010 she took her clients away from Wyatt as his behaviour and financial returns grew more erratic.

Mr. Wyatt was fired in June 2012 when a lawyer representing one of his clients presented Morgan Stanley with evidence that he had been using a personal email address to push clients to buy investments that he held in his own private accounts.

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