Morgan Stanley has agreed to pay $15 million to settle SEC charges stemming from supervisory failures that allowed four former financial advisors to steal millions from client accounts through unauthorized transactions.
The Securities and Exchange Commission (SEC) alleged that the advisors, all now barred from the industry, executed hundreds of unauthorized transactions, misappropriating funds from client accounts by exploiting weaknesses in Morgan Stanley’s policies and procedures related to third-party disbursements.
“Protecting client assets is a core responsibility for every financial-services firm,” said Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement. “Morgan Stanley’s supervisory and compliance lapses enabled its advisors to make hundreds of unauthorized transfers from customer accounts, exposing many others to potential harm.”
Morgan Stanley neither admitted nor denied the allegations as part of the settlement. A company spokesperson said, “These were isolated events that occurred years ago. We take these matters seriously and have enhanced our control framework in partnership with an external expert. In each case, we conducted an internal investigation, terminated the individuals involved, reported them to the authorities, and compensated affected clients.”
The SEC acknowledged Morgan Stanley’s “substantial cooperation” during the investigation and noted that the firm compensated victims and retained a compliance consultant to improve its internal policies.
Advisors Involved in the Fraud
The SEC and federal prosecutors have pursued separate legal actions against the four former financial advisors involved: Michael Carter, Chingyuan “Gary” Chang, Douglas McKelvey, and Jesus Rodriguez.
Michael Carter: In July 2020, the SEC accused Carter of stealing from brokerage clients and an elderly advisory client. He pleaded guilty to wire fraud and investment advisor fraud, admitting to stealing more than $6 million. He was sentenced to five years in federal prison.
Douglas McKelvey: In June 2023, McKelvey pleaded guilty to money laundering in a federal court in Plano, Texas. He admitted to misappropriating at least $1.5 million of investor funds, using the money for cruises, restaurants, salons, and other personal expenses. He was sentenced to 63 months in prison.
Chingyuan “Gary” Chang: In December 2023, the SEC announced a settlement with Chang after he was accused of misappropriating approximately $58,000 from client accounts. Chang repaid the funds as part of the settlement.
Jesus Rodriguez: In January, the SEC filed a lawsuit in federal court in El Paso, Texas, alleging Rodriguez misappropriated about $3.5 million from client accounts. That case is still pending.
Policy Failures Identified
The SEC’s investigation highlighted multiple policy failures at Morgan Stanley that allowed the fraud to continue undetected for years. Specifically, the firm lacked adequate controls for identifying unauthorized Automated Clearing House (ACH) transfers initiated by its advisors.
Before December 2022, Morgan Stanley had no policy requiring the screening of ACH payment instructions to detect cases where an advisor’s name matched the beneficiary of the payment. This oversight allowed advisors to initiate transfers from client accounts to pay personal credit card bills and cover other personal expenses.
Between May 2015 and July 2022, Morgan Stanley missed hundreds of unauthorized ACH transfers involving client funds, the SEC said.
Although Morgan Stanley implemented a third-party fraud detection system in 2015, the SEC found the firm mistakenly believed the system could identify unauthorized transfers involving advisors’ personal accounts. The system, however, was not designed for that purpose, and Morgan Stanley failed to conduct testing to verify its effectiveness over the next five years.
“These failures allowed Carter and Rodriguez to misappropriate client funds without detection, causing significant financial harm,” the SEC regulatory order stated.
Looking Ahead
Morgan Stanley, one of the largest US wealth management firms with more than 10,000 advisors managing nearly $6 trillion in assets, has since overhauled its compliance infrastructure. While the firm’s cooperation helped mitigate regulatory penalties, the settlement serves as a stark reminder of the critical need for robust oversight and continuous validation of fraud detection systems in the financial advisory space.
