A market regulator has fined Morgan Stanley Smith Barney ("MSSB") for ignoring multiple "red flags" involved in a customer's account who ultimately was imprisoned for masterminding a $35 million Ponzi scheme. The Commodity Futures Trading Commission ("CFTC") handed down a $280,000 fine to MSSB over what it classified as improper supervision and records violations tied to accounts opened and ultimately used by Benjamin Wilson to carry on his scheme in the United Kingdom. Wilson is currently serving a seven-year prison sentence after pleading guilty to criminal charges.
According to the CFTC, Wilson began opening multiple accounts for his company, SureInvestment, at MSSB in April 2010. Neither Wilson nor his company had previously been a MSSB customer, and several SureInvestment entities were located in the British Virgin Islands - a country deemed a "high risk jurisdiction" under MSSB compliance procedures. Based on these facts and Wilson's representation that he planned to initially fund the account with $100 million, MSSB required Wilson to provide several documents that included an audit of a SureInvestment entity located in BVI. However, that audit contained several "suspicious irregularities," including numerous typos throughout the document. The CFTC's Order also highlighted the fact that:
A simple internet search would have revealed that neither the Surelnvestment entity that was the subject of the audits nor the purported B.V.I. auditing firm and its principals actually existed.
SureInvestment's reported trading history was also scrutinized by the CFTC, who noted that the company touted compounded returns of nearly 2,900% from 2003 to 2009, including a string of 45 consecutive profitable months.
Despite the multiple red flags highlighted by the CFTC, MSSB allowed Wilson to open the requested accounts and ultimately more than $1 million flowed through the accounts. However, despite the placement of a $250,000 trading limit on the accounts, Wilson and SureInvestment ultimately incurred net trading losses of approximately $600,000 and continued to surpass the trading limit until MSSB ultimately discovered the violation.
In addition to the red flags and failure to enforce the trading limits on the SureInvestment accounts, the CFTC's Order also faulted MSSB for its level of cooperation in responding to a document request in the course of the investigation. In September 2011, MSSB received a document request from the CFTC related to the SureInvestment accounts. In response, a division of MSSB, Morgan Stanley & Co., LLC, provided a response stating that it did not have any responsive documents. However, after the CFTC subsequently discovered several account numbers for the SureInvestment accounts held at MSSB, account records were produced for the first time. Those records disclosed that MSSB failed to keep daily records of the trading limit applicable to the SureInvestment accounts.
While neither admitting nor denying the CFTC's findings, MSSB agreed to resolve the investigation by disgorging the commissions related to the accounts, which amounted to aproximately $16,000, as well as the payment of a $280,000 civil monetary penalty. MSSB also agreed to abstain from future violations of the relevant portions of the Commodity Exchange Act.
A copy of the CFTC's Order is below: