Hanley Law Files FINRA Arbitration Against Morgan Stanley Smith Barney

Hanley Law recently filed a FINRA arbitration claim alleging that Morgan Stanley (CRD No.: 149777) refused to distribute a deceased client’s IRA directly to her beneficiaries because Morgan Stanley determined that the beneficiary designation for the IRAs was invalid under applicable Treasury rulings.  The trustees to the estate allege that the new account form with the invalid beneficiary designation was prepared by Morgan Stanley and approved by Morgan Stanley’s compliance personnel over a decade earlier.  Claimants further allege that no one at Morgan Stanley raised any objection to the way the new account form was completed regarding the invalid beneficiary designations during the previous 13 years.  Claimants allege that the deceased client relied on Morgan Stanley to manage the funds in her IRA accounts, and also to assure that upon her death the funds would be distributed in accordance to her wishes.

Ultimately, the IRAs were distributed to the Estate because, as a result of the invalid beneficiary designation, the funds were payable to the Estate pursuant to the Internal Revenue Code and applicable Treasury rulings, and the Estate was forced to pay substantial taxes.  Claimants allege that unfortunately, because of the violation of the Internal Revenue Code by Morgan Stanley when completing and approving the client’s Individual Retirement Account Applications, the Estate was forced to pay substantial inheritance taxes.  Claimants allege that it is beyond unconscionable that Morgan Stanley raised the issue with the beneficiary designations on the Individual Retirement Account forms almost immediately upon request for the distribution of the accounts, but had remained silent during the 13 years after the client signed the form.  Claimants allege that Morgan Stanley had a duty to review and correct the Individual Retirement Account forms at the time the client opened her Morgan Stanley IRA accounts, and/or at some point thereafter prior to her death, and they failed to meet their obligation to their client which resulted in needless losses.


FINRA’s guidance to its members makes the members obligations to its customers unequivocal:  FINRA members must act in their customer’s best interests; not the best interest of the firm.

It is well-settled that a “broker’s recommendations must be consistent with his customer’s best interests” and are “not suitable merely because the customer acquiesces in [them].” Dane S. Faber, Securities Exchange Act Release No. 49216, 2004 SEC LEXIS 277, at *23-24 (February 10, 2004); see also Dep’t of Enforcement v. Bendetsen, No. C01020025, 2004 NASD Discip. LEXIS 13, at *12 (NAC August 9, 2004) (“[A] broker’s recommendations must serve his client’s best interests and the test for whether a broker’s recommendations are suitable is not whether the client acquiesced in them, but whether the broker’s recommendations were consistent with the client’s financial situation and needs”).  In the instant FINRA Arbitration claim, Claimants allege that Morgan Stanley failed to act in the best interest of their client, and because of this failure, Claimant’s estate was damaged when it was forced to pay substantial federal and state estate taxes.


Hanley law represents individual investors nationwide with significant losses in their portfolios, retirement plans or investment accounts.  Hanley Law is dedicated to assisting investors to recover losses suffered by unsuitability, over-concentration, fraud, misrepresentation, self-dealing, unauthorized trades or other wrongful acts, whether intentional or negligent.  Hanley Law represents clients nationwide in cases against the major Wall Street broker dealers, including Morgan Stanley Smith Barney.

If you have suffered investment losses as a result of your broker’s or brokerage firm’s misconduct, contact Hanley Law to discuss your legal options. Contact Hanley Law at (239)649-0050 or contact us through our Website to arrange a free confidential consultation with an attorney to discuss your experiences with your stock broker which resulted in investment losses.

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.