US-based Financial Industry Regulatory Authority has fined Morgan Stanley $3m — and ordered it to pay more than $4.2m in restitution to 90 Rochester, New York-area retirees — to resolve charges that its supervisory system failed to detect and prevent brokers from persuading Eastman Kodak Company and Xerox employees to take early retirement based upon unrealistic promises of consistently high investment returns and by espousing unsuitable investment strategies.
The Financial Industry Regulatory Authority (FINRA) has found that Morgan Stanley failed to reasonably supervise the activities of Michael Kazacos and David Isabella, two former registered representatives in its Rochester branch office. FINRA has permanently barred Mr. Kazacos from the securities industry for committing numerous violations of FINRA rules in connection with his solicitation and handling of individual retirement arrangement rollover/retirement accounts, such as making unrealistic predictions that customers would earn investment returns of 10% each year.
In a formal disciplinary complaint filed, FINRA charged Mr. Isabella with having engaged in similar misconduct. The matter will be adjudicated before a three-member FINRA hearing panel. FINRA has also found that Ira Miller, the manager of Morgan Stanley’s Rochester branch, failed to reasonably supervise both representatives. Mr. Miller was fined $50,000, suspended from acting in a principal capacity for one year and ordered to re-qualify as a principal before serving in such capacity in the future.
FINRA has also found that Mr. Miller failed to take appropriate action to reasonably supervise Mr. Kazacos and Mr. Isabella to prevent their unsuitable investment recommendations and failures to disclose risks to many customers.
In settling these matters, Morgan Stanley, Mr. Kazacos and Mr. Miller neither admitted nor denied the findings, but consented to the entry of FINRA’s findings.
Susan Merrill, FINRA’s executive vice president and chief of enforcement, said: Protecting investors who have retired or are considering retirement has been one of FINRA’s top priorities. Brokerage firms and brokers who serve investors considering retirement must ensure that their customers are given suitable investment recommendations based upon reasonable assumptions of market performance and are given thorough disclosure of investment risks.
The supervisory failures of Morgan Stanley and its management led to losses suffered by customers at a vulnerable time in their lives — retirement — which could have been avoided.
