FINRA Censured and Fined Morgan Stanley $675,000 Over Bond Interest Payments

The Financial Industry Regulatory Authority (FINRA) fined and censured Morgan Stanley Smith Barney (CRD No. 149777) and Morgan Stanley & Co. (CRD No. 8209) after the firms allegedly misrepresented municipal bond interest paid to clients as tax-exempt when in actuality the interest payments were taxable.

FINRA alleged that between July 2009 and December 2013 Morgan Stanley paid clients approximately $880,000.00 in interest, which customers believed was tax-exempt interest from municipal bonds that were held in their accounts. FINRA alleged that during the relevant period, Morgan Stanley generated or held more than 1,500 short positions in tax-exempt municipal securities that corresponded to long positions in customer accounts. FINRA alleged that the short positions resulted primarily from trading and operational errors. In these instances, Morgan Stanley paid the interest to the customer and the interest was therefore taxable.

As a result of the foregoing, FINRA alleged that during the relevant period Morgan Stanley failed to disclose to customers that, because the firm was short on the security, they were not receiving tax exempt interest from the issuers of the municipal securities reflected on their account statements. FINRA further alleged that the firm also sent inaccurate account statements and Forms 1099s to at least 1,500 customers who were receiving firm-paid interest. FINRA alleged that these customers’ monthly and yearly account statements inaccurately stated that the interest they received was “tax exempt income” and the year-end Forms 1099s that Morgan Stanley sent to these customers inaccurately stated that the interest paid by the firm was “tax-exempt interest”. (See FINRA Case No. 2013038306401)

If you have suffered investment losses as a result of your broker’s or brokerage firm’s misconduct, contact the Hanley Law to discuss your legal options. The Hanley Law is dedicated to helping investors who have been victims of securities fraud. If you have lost money as a result of securities fraud, you may be entitled to recover your investment losses. Contact our office toll free at (239) 649-0050 for a free initial consultation.

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