Compliance November 19, 2007

Morgan Stanley Sued for Allowing Banned Broker to Trade

A lawsuit filed against Morgan Stanley claims that, although the Securities and Exchange Commission (SEC) barred an adviser from trading over-the-counter securities in the 1980s, Morgan Stanley's predecessor Dean Witter incorrectly told her in 1995 that the ban had been lifted.
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According to a news report on Law.com, the suit, filed in Broward Circuit Court in Florida, alleges that Morgan Stanley, which merged with Dean Witter in 1997, allowed West Palm Beach financial adviser Shelley Cohen to sell, solicit, and trade securities from 1995 until she was fired in 2004.

The lawsuit is filed as a class action; the class consists of nearly 35 investors who traded with Cohen from October 2001 to October 2004, the news report said. The investors charge Morgan Stanley with breaching its contract to uphold securities regulations and its fiduciary duty by telling Cohen she could trade stocks.

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The suit seeks to recover all the money class members lost as a result of investing with Cohen, plus interest. An attorney representing the class estimated damages will run into the millions, but said he could not be more specific until after discovery occurs, according to Law.com.

In the early 1980s, the SEC filed a claim against Cohen in federal court in Washington, D.C., for the violation of anti-fraud procedures, which resulted in the manipulation of the market price of Diamond warrants, according to the suit. It also filed an administrative proceeding against Cohen.

In 1983, Cohen consented to the entry of a permanent injunction barring her from violating securities law. A settlement agreement with the SEC stated that she “shall not make recommendations to customers to purchase nonexchange securities unless authority for such recommendations is obtained in writing for her branch manager.” She was also barred from holding any supervisory positions.

According to the lawsuit, the settlement and judgment made Cohen, who worked as a registered representative of Dean Witter at the time, “‘statutorily disqualified’ from serving as a registered representative of any broker-dealer,” the news report said. However, Dean Witter and Morgan Stanley kept her employed.

The lawsuit alleges that in 1995, someone in Dean Witter’s compliance department incorrectly notified Cohen and her supervisor that the ban against her no longer applied since 10 years had passed. Cohen then began to recommend, accept, and solicit orders on unlisted securities, until Morgan Stanley realized in 2004 that the ban against Cohen was still in force.

Cohen’s supervisors told her she was not to trade these securities, yet the company claimed she placed two orders to sell certain securities for clients, one using another financial adviser’s identifying number, just days after she received these warnings. Cohen was fired and filed an employment action against the firm. She lost the employment action in June 2006.

In a response to the employment suit, Morgan Stanley admitted a member of its compliance department incorrectly advised Cohen she could trade the stocks. The admission came in a court document Morgan Stanley filed to defend its actions before a National Association of Securities Dealers arbitration panel.

Compliance November 19, 2007

SEC Reconsidering Terrorist Tracking Tools

The Securities and Exchange Commission (SEC) is trying to decide if it can – or should - help investors be more aware of business ties with terrorists.
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The SEC has now asked for public comment about “…whether to develop mechanisms to facilitate greater access to companies’ disclosures concerning their business activities in or with countries designated as State Sponsors of Terrorism by the U.S. Secretary of State.” The five nations currently designated by the U.S. Secretary of State as state sponsors of terrorism are Cuba, Iran, North Korea, Sudan and Syria.

The Commission’s request for comment comes in the form of a concept release that asks whether improvements in public access to company disclosures can be made.

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Earlier this year, the SEC temporarily provided access to a Web tool that linked to portions of companies’ most recent annual reports that described their business activities in any of the five countries (see SEC Makes Terrorism-Link Info Available to Investors). However, the SEC said that since the linked reports were not always the company’s most recent disclosure, and because of other concerns with the Web tool, it was “…discontinued pending consideration of the issues set forth in the concept release.’

At the time Congressman Barney Frank (D-Massachusetts), the head of the U.S. House Financial Services Committee said that the SEC should consider a more accurate method for compiling the list, noting that some of the companies on the list have dumped their ties with the terrorist states since the list was created (see Legislator Condemns SEC’s Method for Pinpointing Terrorist State-linked Companies).

“Investors have told us they want to avoid supporting terrorism directly or indirectly through their investments,’ said SEC Chairman Christopher Cox. “Some of the information they need for this purpose is already on file with the SEC. We’re interested in ways to help investors find what they’re looking for.’

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