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Morgan Stanley Faces Challenges in Managing Employee Conduct

Financial services firm, Morgan Stanley, has recently dealt with misconduct in its wealth management division. The company discovered alleged misconduct by several stock traders who were attempting to conceal major losses of between $100 and $140 million in emerging-market currencies. There were four traders under investigation including two senior Morgan Stanley employees. The practice being investigated is known as mismarking. Mismarking involves pricing securities at levels that do not reflect the actual valuation. Extreme volatility in global currency has fueled interest in attempting to leverage that volatility to make money. The Bank for International Settlements indicated that in April of 2019, there was a 16 percent surge in the movement of foreign exchange options to $294 billion per day.

This investigation came in a year when Morgan Stanley had numerous struggles. In February 2019, the Securities and Exchange Commission (SEC) entered into a final judgment with a Morgan Stanley advisor who was charged with misappropriating client funds and defrauding clients. James Polese mishandled $350,000 of one client's funds, moving $250,000 into his personal account. Polese plead guilty to conspiracy, securities fraud, aggravated identity theft, and bank fraud. He paid $355,000 in restitution and is serving a 60-month prison term. Internal controls need to be established at Morgan Stanley to immediately detect when client funds are being diverted to advisor or employee accounts to prevent this type of misconduct.

Earlier in 2019, another Morgan Stanley employee, Michael Wu, was terminated by the company for alleged participation in a college admission cheating scandal. Wu is accused of referring a family to the person most centrally connected to the college admissions cheating scandal, Rick Singer. The family referred to Singer is accused of paying $6.2 million to secure entry for their daughter into Stanford University. Wu did not cooperate in the internal investigation regarding his connection to the cheating scandal.

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