Morgan Stanley on Tuesday suffered a further blow to its reputation as regulators accused it of improper mutual fund sales practices and levied a $2 million fine.
The Wall Street institution, one of the largest financial services companies in the world, was accused by the National Association of Securities Dealers of offering numerous improper incentives over many months to its sales staff to push their own mutual funds to clients over non-proprietary funds.
The bank organized 29 sales contests between October 1999 and December last year, offering non-cash incentives to winners including exotic travel trips and tickets to sports events and rock concerts given by the Rolling Stones and Britney Spears.
“It is not acceptable for NASD-regulated firms to hold contests for prizes that promote the sale of one fund, especially their own, over other mutual fund products,” said Mary Schapiro, NASD’s vice-chairman.
Morgan Stanley said: “We’re pleased to put this matter behind us.”
The NASD action is another swipe at the embattled $7,000 billion U.S. mutual fund industry, already laboring under multiple regulatory investigations over improper sales practices.
In another case on Tuesday, Theodore Sihpol, a former Bank of America broker, was charged with grand larceny and securities fraud by Eliot Spitzer, New York attorney-general, for his alleged role in the unlawful trading of mutual funds.
Stephen Cutler, Securities and Exchange Commission enforcement director, also filed civil charges. Mr. Sihpol has surrendered to authorities in New York.
Mr. Sihpol is the first Bank of America employee to be charged in an investigation that came to light September 3, when Mr. Spitzer announced a $40m settlement with Canary Capital Partners, a hedge fund, and its manager Edward Stern, for making improper trades in funds managed by Bank of America, Janus, Bank One, and Strong.
The hedge fund was allowed to buy mutual funds at prices not available to all investors through a process called late trading.
Mr. Sihpol, 36, was a broker responsible for executing trades of Bank of America’s Nations Fund Trust for Canary. The bank is investigating and has fired several people tied to Canary.
Bank of America said it was co-operating fully with law enforcement and regulatory agency inquiries into the matter: “We are moving diligently to address any issues within our company in order to maintain the trust of our customers.”