Lincoln, Morgan Stanley, Western must pay $1.7M in FINRA cases

Lincoln, Morgan Stanley, Western International must pay combined $1.7 million over supervision cases

November 30, 2022 7:07 PM

Three major wealth management firms will pay significant sums to resolve allegations that they failed to live up to their duties.

Lincoln Financial Group's Lincoln Financial Advisors, Morgan Stanley and Atria Wealth Solutions' Western International Securities must pay a combined $1.7 million under two FINRA settlements and an arbitration award. The three cases are separate, but each involve allegations of breaches of supervisory duty. As the third leading type of client claim in FINRA arbitration this year to the tune of 889 cases filed through October, allegations of failure to supervise remain a frequent area of concern for regulators.

That's especially true these days, with the growth in the available types of alternative investment products and accompanying scrutiny of them, said Arbitration Insight's Louis Straney, a former regulator who often serves as an expert witness.

"The supervision of complex or nonconventional products has always been a priority for the regulators," Straney said. "The regulators have limited resources to address the needs of an exponentially expanding marketplace."

Straney recommended that any customers who don't understand their account statements or are having trouble getting a hold of their broker go up the company chain.

"They should never hesitate to contact the supervisor of the operation directly if they have any questions or concerns," he said. "They should let the supervisors do their job by direct contact, which is one of the best ways to both understand as a client and protect your family's assets."

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For a look at three separate supervisory cases against Lincoln, Morgan Stanley and Western International Securities from the past month, scroll down the slideshow. To view nine recommendations offered by the CFA Institute to protect consumers in the era of "gamification," click here. And to read the story of a former J.P. Morgan Advisors broker hit with client complaints totaling more than $150 million, follow this link.

Lincoln must pay Marine Corps general and spouse $100K

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Lincoln Financial Advisors, a brokerage subsidiary of giant insurer Lincoln Financial Group, owes $100,000 in damages for supervisory failures under a FINRA arbitration award.

Brig. Gen. William Blake Crowe of the U.S. Marine Corps and his wife Lynne sought $1.4 million in damages from Lincoln and their advisor, Thomas James Prieur, based on their allegations of fraud in the form of "unauthorized panic selling" at the outbreak of the coronavirus, according to the Nov. 16 decision by a Baltimore-based panel. The clients accused their advisor of liquidating their entire retirement accounts "without their informed consent" and not immediately following their "clear and direct instructions" to reinstate the positions in their portfolios, the award states.

Crowe, the son of onetime Chairman of the Joint Chiefs of Staff Adm. William J. Crowe, and his wife claimed that Prieur defrauded them "when he recommended that they move their accounts to cash in March 2020 as a result of the market impact of the Covid-19 pandemic," according to FINRA BrokerCheck. They said Prieur "engaged in unauthorized trading and failed to reinvest into the market in accordance with their instructions."

Prieur replied to the allegations in a comment listed on BrokerCheck as well.

"The firm's investigation found no evidence to support the client's allegations related to the initial customer complaint," he wrote.

The arbitrators denied three out of their four claims, rejecting the allegations of fraud but holding Lincoln liable for failure to supervise Prieur. In addition, the panel ordered Lincoln to pay the clients $625 for the nonrefundable portion of their filing fee and required the firm to re-establish Lynne Crowe's individual retirement account "as if it had remained invested as of March 11, 2020, to the present date," according to the award.

"Lincoln looks forward to putting this matter behind us now that the arbitration decision has been reached," spokesman Jay Russo said in an email.

Lawyers representing the clients didn't respond to an email seeking comment. Prieur and his lawyers didn't reply to an inquiry.

Morgan Stanley ordered by FINRA to pay $698K over supervisory breaches

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More than 60 Morgan Stanley clients will receive thousands of dollars in restitution after a FINRA investigation found failures in the firm's supervision of high-risk product sales.

After paying some restitution earlier through arbitration awards and settlements relating to client losses from the risky products, Morgan Stanley agreed to pay $698,000 in additional reimbursement and a fine to resolve FINRA's charges of supervisory breaches involving nine brokers' sales practices over a five-year span, according to the Nov. 21 settlement.

From January 2014 to December 2018, the firm ran afoul of its own policy requiring brokers to create a "plan of solicitation" outlining their rationale for recommending that clients buy more than 60,000 shares of any security that's not part of the S&P 500 Index, rated with three or more stars by an independent research firm or covered by the company's own research, FINRA said. The firm's systems alerted it to hundreds of such recommendations by the nine brokers that didn't include any such plan but didn't take "appropriate action in response," investigators said.

"In particular, the firm did not evaluate whether the recommendations were consistent with the customers' investment profiles," according to the letter of acceptance, waiver and consent. "These customers incurred realized losses as a result of many of the recommended trades."

The firm didn't admit or deny the allegations as part of settling the case.

"Morgan Stanley is pleased to resolve this matter concerning issues that occurred more than four years ago," spokeswoman Christine Jockle said in a statement. "Morgan Stanley has improved its processes and controls and agreed to compensate the small number of impacted clients."

One former Morgan Stanley broker who wasn't identified by name but has been barred from the industry caused eight clients to sustain more than $1.6 million in combined losses from investments in a Chinese telecommunications company, according to the document. A half dozen of those customers had a "moderate" risk tolerance. The advisor retroactively submitted a plan of solicitation after the company noticed that he didn't create one, but Morgan Stanley never officially approved it, FINRA said. He kept recommending that clients invest in the foreign telecom company "without the firm taking reasonable steps to determine that his recommendations were suitable for these customers," according to investigators.

The high-risk products sold without adequate supervision included master limited partnerships in the energy and natural resources industries and startups in the pharmaceutical and biotechnology sectors, FINRA said. In the settlement, the regulator ordered Morgan Stanley to pay restitution of $497,897 to 62 customers and a fine of $200,000.

Atria subsidiary Western International dinged by FINRA for nontraded REIT sales

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Western International Securities, a subsidiary of private equity-backed Atria Wealth Solutions, agreed to pay $871,000 to settle FINRA's charges of supervisory failures.

Between 2013 and 2017, the Pasadena, California-based firm "failed to establish, maintain and enforce a supervisory system, including written supervisory procedures" for sales of nontraded real estate investment trusts, according to the firm's Oct. 31 letter of acceptance, waiver and consent. And, over the past seven years, Western breached its duty to report 45 written client complaints in a timely manner, investigators said. FINRA's case came about four months after Western drew the Securities and Exchange Commission's first enforcement case under Regulation Best Interest involving sales of a different alternative investment product.

Western supervisory guidelines "did not specify what documents to review or steps to take in conducting a suitability analysis for nontraded REITs," according to FINRA. "In practice, some supervisors reviewed only the nontraded REIT disclosure form to assess suitability. Those forms lacked important customer profile information, including the customer's age, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and financial situation, including income, liabilities, and net worth."

Representatives for Western — which paid a combined $970,000 in separate FINRA cases from 2018 and 2020 that involved timely regulatory disclosures and supervision of alternative asset sales — declined to comment. The firm didn't admit or deny the allegations in the settlement, which orders it to pay a fine of $400,000 and restitution of $471,401.57 plus interest to 48 customers.

A former Western broker named Megurditch "Mike" Patatian is facing a potential bar from the industry after FINRA's investigation into his conduct led to the regulator's probe of the brokerage, the document shows. At least 59 of his clients bought $7.8 million in nontraded REITs "without a reasonable basis to believe that the recommendations were suitable," FINRA said. An enforcement panel barred Patatian in June, but he's currently appealing the decision, with hearings slated for later next month, according to the ex-broker's attorney, Jeffrey Kob.

"They had five witnesses out of 59 alleged victims," Kob said. "The panel decided to sanction Mr. Patiatian and they did it, in my opinion, with every regulatory tool at their disposal."