In re Morgan Stanley Smith

  
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 UNITED STATES OF AMERICA 
 Before the 
 SECURITIES AND EXCHANGE COMMISSION 
 
SECURITIES EXCHANGE ACT OF 1934 
Release No. 101842 / December 9, 2024 
 
INVESTMENT ADVISERS ACT OF 1940 
Release No. 6782 / December 9, 2024 
 
ADMINISTRATIVE PROCEEDING 
File No. 3-22339 
 
 
 
In the Matter of 
 
Morgan Stanley Smith 
Barney LLC,  
 
Respondent. 
 
 
ORDER INSTITUTING 
ADMINISTRATIVE AND CEASE-
AND-DESIST PROCEEDINGS, 
PURSUANT TO SECTION 15(b) OF 
THE SECURITIES EXCHANGE ACT 
OF 1934 AND SECTIONS 203(e) AND 
203(k) OF THE INVESTMENT 
ADVISERS ACT OF 1940, MAKING 
FINDINGS, AND IMPOSING 
REMEDIAL SANCTIONS AND A 
CEASE-AND-DESIST ORDER  
 
 
I. 
 
 The Securities and Exchange Commission (“Commission”) deems it appropriate and in the 
public interest that public administrative and cease-and-desist proceedings be, and hereby are, 
instituted pursuant to Section 15(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and 
Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 (“Advisers Act”) against 
Morgan Stanley Smith Barney LLC (“Morgan Stanley Smith Barney” or “Respondent”).   
 
II. 
 
 In anticipation of the institution of these proceedings, Respondent has submitted an Offer 
of Settlement (the “Offer”) which the Commission has determined to accept.  Solely for the 
purpose of these proceedings and any other proceedings brought by or on behalf of the 
Commission, or to which the Commission is a party, and without admitting or denying the findings 
herein, except as to the Commission’s jurisdiction over it and the subject matter of these 
proceedings, which are admitted, Respondent consents to the entry of this Order Instituting 
Administrative and Cease-and-Desist Proceedings, Pursuant to Section 15(b) of the Securities 
Exchange Act of 1934 and Sections 203(e) and 203(k) of the Investment Advisers Act of 1940, 

  
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Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as 
set forth below. 
 
III. 
 
 On the basis of this Order and Respondent’s Offer, the Commission finds
1
 that: 
 
Summary 
 
1. These proceedings arise out of Morgan Stanley Smith Barney’s failure to adopt and 
implement policies and procedures reasonably designed to prevent Morgan Stanley Smith Barney 
personnel from misusing and misappropriating funds from advisory client and brokerage customer 
accounts.  Morgan Stanley Smith Barney applied the same policies, procedures, and systems to 
both brokerage and advisory accounts with respect to third-party disbursements.  Morgan Stanley 
Smith Barney’s inadequate policies and procedures and systems to implement them led to its 
failure reasonably to supervise four of its investment adviser and registered representatives, which 
Morgan Stanley Smith Barney referred to as financial advisors (“FAs”), who misappropriated 
funds from client and customer accounts while employed at Morgan Stanley Smith Barney:  
Michael Carter (“Carter”), Chingyuan “Gary” Chang (“Chang”), Douglas McKelvey 
(“McKelvey”), and Jesus Rodriguez (“Rodriguez”).
2
 
2. Until at least December 2022, Morgan Stanley Smith Barney failed to adopt and 
implement policies and procedures reasonably designed to prevent and detect misappropriation 
from client and customer accounts by its FAs by means of unauthorized Automated Clearing House 
(“ACH”) payments that were externally initiated.  Morgan Stanley Smith Barney did not have any 
policy or procedure that screened the ACH payment instructions Morgan Stanley Smith Barney 
received from the originating financial institution for the name of the beneficiary of the ACH 
payments, which allowed Rodriguez, McKelvey and Chang to initiate ACH payments to pay their 
own credit card bills or otherwise improperly transfer funds for their own benefit.   
3. In addition, from October 2015 to at least February 2021, Morgan Stanley Smith 
Barney failed to implement policies and procedures reasonably designed to prevent and detect 
misappropriation by its FAs using unauthorized cash wire transfers from multiple unrelated 
customer or client accounts of the same FA to the same third-party external account.  Although 
Morgan Stanley Smith Barney understood such activity was a red flag and in 2015 implemented a 
third-party fraud detection software system that Morgan Stanley Smith Barney mistakenly believed 
 
1
  The findings herein are made pursuant to Respondent’s Offer of Settlement and are not 
binding on any other person or entity in this or any other proceeding.  
 
2
  The Commission has filed or instituted actions against each of these FAs.  See SEC v. 
Michael Barry Carter, No. 20-cv-02112-CCB (D. Md.) (filed July 20, 2020; final judgment 
entered June 30, 2021); SEC v. Douglas McKelvey, No. 23-cv-00564-O (N.D. Tex.) (filed June 
6, 2023; final judgment entered April 26, 2024); In the Matter of Chingyuan “Gary” Chang, 
Exch. Act Rel. No. 99239 (Dec. 26, 2023) (settled order); SEC v. Jesus Rodriguez (24-cv-00027) 
(W.D. Texas) (pending).   
 

  
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would, among other things, monitor for such activity, the system had not in fact been designed to 
detect when such patterns of wire activity had occurred.  Moreover, Morgan Stanley Smith Barney 
did not perform testing to validate the use of the system for that purpose at any time over the course 
of the next five years.  Morgan Stanley Smith Barney’s failure reasonably to monitor for this risk 
allowed Carter and Rodriguez to misappropriate from the Morgan Stanley Smith Barney accounts 
of their customers and clients without detection.         
4. By failing to adopt and/or implement written policies and procedures reasonably 
designed to prevent misappropriation by its FAs using unauthorized externally-initiated ACH 
payments and unauthorized cash wires from multiple unrelated client accounts of the same FA to 
the same third-party account, Morgan Stanley Smith Barney willfully
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  violated Section 206(4) of 
the Advisers Act and Rule 206(4)-7 thereunder.   
5. Further, Morgan Stanley Smith Barney’s inadequate supervisory policies, 
procedures, and systems for implementation led to its failure to prevent and detect violations of the 
antifraud provisions of the Exchange Act and/or Advisers Act by Carter, Chang, McKelvey, and 
Rodriguez.  As a result, Morgan Stanley Smith Barney failed reasonably to supervise Carter, 
Chang, McKelvey and Rodriguez within the meaning of Section 15(b)(4)(E) of the Exchange Act 
and/or Section 203(e)(6) of the Advisers Act. 
Respondent 
 
6. Morgan Stanley Smith Barney is a Delaware limited liability company with its 
principal place of business in Purchase, New York.  Morgan Stanley Smith Barney has been 
registered with the Commission as both a broker-dealer and investment adviser since May 2009.  
Morgan Stanley Smith Barney is an indirect wholly-owned subsidiary of Morgan Stanley, a 
Delaware Corporation that has a principal office in New York, New York.  On June 29, 2018, the 
Commission issued a settled Order Instituting Administrative and Cease-and-Desist Proceedings 
against Morgan Stanley Smith Barney finding that Morgan Stanley Smith Barney willfully violated 
Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder by failing to adopt policies and 
procedures reasonably designed to prevent Morgan Stanley Smith Barney’s personnel from 
misusing and misappropriating funds in client accounts and that Morgan Stanley Smith Barney 
failed reasonably to supervise former Morgan Stanley Smith Barney FA Barry Connell within the 
meaning of Section 203(e)(6) of the Advisers Act, who had initiated over $7 million in unauthorized 
transactions out of advisory client accounts primarily by making false attestations that he had 
 
3
 “Willfully,” for purposes of imposing relief under Section 15(b) of the Exchange Act and 
Section 203(e) of the Advisers Act, “‘means no more than that the person charged with the duty  
knows what he is doing.’”  Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (quoting 
Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949)).  There is no requirement that the actor 
“also be aware that he is violating one of the Rules or Acts.” Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 
1965).  The decision in The Robare Group, Ltd. v. SEC, which construed the term “willfully” for 
purposes of a differently structured statutory provision, does not alter that standard.  922 F.3d 
468, 478-79 (D.C. Cir. 2019) (setting forth the showing required to establish that a person has 
“willfully omit[ted]” material information from a required disclosure in violation of Section 207 
of the Advisers Act). 
 

  
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received verbal requests from the clients for third-party wires and cash journals in approximately 90 
instances between December 2015 and November 2016.  See In the Matter of Morgan Stanley Smith 
Barney LLC, Exch. Act Rel. No. 83571 (June 29, 2018) (the “2018 Morgan Stanley Smith Barney 
Order”).  
 
Facts 
 
7. Morgan Stanley Smith Barney’s FAs provide services to both Morgan Stanley 
Smith Barney’s investment advisory clients and its brokerage customers.  Morgan Stanley Smith 
Barney applies the same policies, procedures, and systems to both brokerage and advisory accounts 
with respect to third-party disbursements.  Carter, Chang, McKelvey and Rodriguez, collectively, 
misappropriated millions of dollars from customer and client accounts primarily through two forms 
of third-party disbursements: unauthorized ACH payments and unauthorized wire transfers. 
8. As a registered investment adviser, Morgan Stanley Smith Barney is subject to Rule 
206(4)-7 under the Advisers Act, known as the compliance rule.  Among other things, the 
compliance rule requires advisers to adopt and implement written policies and procedures 
reasonably designed to prevent violations of the Advisers Act and the rules thereunder by the firm 
and its supervised persons.  As noted in the adopting release for the compliance rule, the 
Commission stated its expectation that an adviser’s policies and procedures at a minimum would 
address a number of items, including “[s]afeguarding of client assets from conversion or 
inappropriate use by advisory personnel.”   
9. In addition, the Commission has repeatedly emphasized that the duty to supervise 
for broker-dealers and investment advisers is a critical component of the federal regulatory scheme.  
In the Matter of Signator Investors, Inc., et al., Exch. Act Rel. No. 75670, 2015 WL 4760909 at *8 
(August 13, 2015) (settled order). 
Morgan Stanley Smith Barney Failed to Adopt and Implement Policies and Procedures 
Reasonably Designed to Prevent and Detect Unauthorized Externally-Initiated ACH Payments  
10. Morgan Stanley Smith Barney offers its brokerage customers and advisory clients 
the ability to transfer cash from their Morgan Stanley Smith Barney accounts to outside parties 
using a variety of methods, including ACH payments.  The ACH system is a nationwide payment 
network through which financial institutions accumulate and send each other electronic cash 
transfers.  The ACH system is commonly used to allow customers of financial institutions to 
transfer cash for such purposes as online bill payments and money transfers.  In simple terms, an 
externally-initiated ACH payment involves a customer of another financial institution (the 
“originating financial institution”) initiating payment instructions to request and obtain payment 
from a particular account at the financial institution receiving the payment instruction (the 
“receiving financial institution”).  The originating financial institution transmits the payment 
instructions to the receiving financial institution as part of batches using the ACH system.  Morgan 
Stanley Smith Barney failed to adopt and implement policies and procedures reasonably designed 
to prevent and detect unauthorized ACH payments from client and customer accounts where 
Morgan Stanley Smith Barney was the receiving financial institution in an externally-initiated 
ACH transaction.   

  
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11. ACH payments, like other methods of transferring funds to outside parties, pose 
fraud risks to broker-dealers and investment advisers that offer the service, including the risk of 
misappropriation by supervised persons.  Morgan Stanley Smith Barney FAs assigned to Morgan 
Stanley Smith Barney customer and client accounts have ready access to all the account 
information necessary to initiate unauthorized externally-initiated ACH payments to debit those 
customer or client accounts, such as name of the account owner, routing number and account 
number.  However, Morgan Stanley Smith Barney’s fraud prevention procedures were not 
reasonably designed to address this risk of misappropriation.   
12. ACH payment instructions from an originating financial institution to Morgan 
Stanley Smith Barney as the receiving financial institution include details such as dollar amount to 
be credited or debited, account and routing numbers at the receiving financial institution, and in 
many instances, the name of the beneficiary of the account at the originating financial institution.  
Morgan Stanley Smith Barney had no procedures for monitoring externally-initiated ACH 
payment instructions for indications of internal fraud, and did not take steps to screen ACH 
payment instructions it received from originating financial institutions to detect instances in which 
a Morgan Stanley Smith Barney FA servicing the account was the beneficiary of the ACH 
payment it debited from a Morgan Stanley Smith Barney customer or client account.   
13. Morgan Stanley Smith Barney’s failure to adopt and implement policies and 
procedures reasonably designed to address externally-initiated ACH payments led to its failure to 
prevent and detect misappropriation by three FAs:  Rodriguez, McKelvey, and Chang.  Over a 
seven-year period, these three FAs misappropriated a total of more than $1.7 million through 
unauthorized externally-initiated ACH payments.  In hundreds of instances between May 2015 and 
July 2022, Morgan Stanley Smith Barney debited its brokerage customer and advisory client 
accounts for unauthorized externally-initiated ACH payments based on the ACH payment 
instructions it received that included a payment beneficiary name that matched the name of one of 
these FAs assigned to the Morgan Stanley Smith Barney account.  These ACH payments were 
typically to pay the FA’s credit card bill or to transfer funds to the FA’s account at an online 
payment application.  Specifically:  
a. Between November 2018 and July 2021, Rodriguez made approximately 
185 unauthorized ACH payments from accounts of his Morgan Stanley Smith Barney clients and 
customers while he was employed as a registered representative and investment adviser 
representative in Morgan Stanley Smith Barney’s El Paso, TX office.  These transfers totaled over 
$575,000 and were primarily to make payments to his credit cards, car loan and online payment 
accounts.  For approximately 83 of these unauthorized ACH payments, the ACH payment 
instructions received by Morgan Stanley Smith Barney identified Rodriguez or some similar variant 
of his name as the beneficiary of the payment.   
b. Between May 2015 and February 2022, McKelvey made more than 250 
unauthorized ACH payments from the Morgan Stanley Smith Barney accounts of two elderly 
relatives who were brokerage customers while he was employed as a registered representative and 
investment adviser representative in Morgan Stanley Smith Barney’s Southlake, TX office.  These 
transfers totaled over $1.15 million and were primarily to pay his and his wife’s credit cards.  For 
virtually all of these unauthorized ACH payments, the ACH payment instructions received by 
Morgan Stanley Smith Barney identified McKelvey or his wife as the beneficiary of the payment.   

  
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c. Between September 2021 and July 2022, Chang made approximately 40 
unauthorized ACH payments from four customer and/or client accounts while employed as a 
registered representative and investment adviser representative in Morgan Stanley Smith Barney’s 
Cupertino, CA office.  These transfers totaled over $58,000 and were primarily issued to online 
payment application accounts belonging to Chang.  For virtually all of these unauthorized ACH 
payments, the ACH payment instructions received by Morgan Stanley Smith Barney identified 
Chang as the beneficiary of the payment. 
14. Through their misappropriation of advisory client and brokerage customer funds 
using unauthorized externally-initiated ACH payments, each of the three former Morgan Stanley 
Smith Barney FAs violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and/or 
Sections 206(1) and (2) of the Advisers Act.  Morgan Stanley Smith Barney’s failure to adopt and 
implement policies and procedures reasonably designed to address externally-initiated ACH 
payments led to Morgan Stanley Smith Barney’s failure to prevent and detect these FAs’ 
misappropriation for years.   
15. As discussed in paragraph 25 below, in February 2022 Morgan Stanley Smith 
Barney began a retroactive review of externally-initiated ACH payments, which ultimately 
identified the unauthorized ACH payments by McKelvey and Chang.   
Morgan Stanley Smith Barney Failed to Implement Policies and Procedures Reasonably 
Designed to Prevent and Detect Unauthorized Cash Wires  
16. From at least October 2015 to at least February 2021, Morgan Stanley Smith 
Barney failed to implement policies and procedures reasonably designed to prevent and detect 
misappropriation by its FAs using unauthorized cash wire transfers from multiple unrelated client 
or customer accounts of the FA to the same third-party external account.    
17. In June 2015, the Financial Industry Regulatory Authority (“FINRA”) issued a 
Letter of Acceptance, Waiver and Consent
4
 in which it found that from at least June 2009 through 
November 2014, Morgan Stanley Smith Barney had failed to establish, maintain and enforce 
supervisory systems and written procedures that were reasonably designed to review and monitor 
the transmittal of funds from customer accounts, including by failing to review and monitor 
outgoing wire transfers and branch checks disbursed from multiple customer accounts to the same 
third-party account.  FINRA found further that as a result, between October 2008 and June 2013, 
three Morgan Stanley Smith Barney registered representatives in two different branch offices were 
able to convert, collectively, almost $500,000 from thirteen brokerage customer accounts through 
fraudulent wires and branch checks sent from the customers’ accounts to third-party accounts.  
Morgan Stanley Smith Barney represented to FINRA that it implemented a manual report to 
address those deficiencies in December 2014.   
18. Morgan Stanley Smith Barney ran and reviewed this manual report monthly for 
both client advisory and customer brokerage accounts from December 2014 until October 2015.  In 
October 2015, Morgan Stanley Smith Barney began using third-party fraud detection software to 
 
4
 Financial Industry Regulatory Authority Letter of Acceptance, Waiver and Consent, No. 
2011025479301 (June 19, 2015).  

  
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monitor wires to external accounts in real time for potential fraud by assigning a risk score to each 
wire.  Based on a calibration report it received from the third-party software provider, Morgan 
Stanley Smith Barney believed that the software would detect and alert Morgan Stanley Smith 
Barney personnel to suspicious cash transfers from multiple unrelated brokerage customer or 
advisory client accounts to single third-party accounts, and based on this belief, Morgan Stanley 
Smith Barney discontinued running the manual report at that time.  However, the software was not 
in fact calibrated to detect this pattern of activity, and Morgan Stanley Smith Barney’s own 
compliance documentation from 2019 did not indicate that this pattern of activity was a parameter 
included among the payment activities the software was configured to monitor.  Moreover, 
Morgan Stanley Smith Barney never conducted any testing of the software system’s performance 
in monitoring this pattern of wire activity in the years that followed, which might have alerted 
Morgan Stanley Smith Barney to the fact that the system was not performing such surveillance.  In 
fact, Morgan Stanley Smith Barney did not identify this gap in its surveillance procedures until 
February 2021 after the Commission staff’s inquiry.   
19. Morgan Stanley Smith Barney’s failure to implement policies and procedures 
reasonably designed to monitor this known risk led to its failure to prevent and detect Carter’s and 
Rodriguez’s misappropriation through unauthorized wires from multiple brokerage and advisory 
accounts to single external accounts at a third-party financial institution for their own benefit for a 
period spanning years.  Specifically: 
a. Between October 2007 and May 2019, Carter misappropriated over $6 
million dollars from four brokerage customers and an investment advisory client while he was 
employed as a registered representative and investment adviser representative at Morgan Stanley 
Smith Barney.  Of that amount, Carter issued at least 54 unauthorized cash wires totaling over $4.5 
million from four unrelated Morgan Stanley Smith Barney advisory and brokerage accounts to the 
same external account at a third-party bank during the time in which Morgan Stanley Smith Barney 
failed to implement procedures reasonably designed to prevent and detect this pattern of fraudulent 
wire activity.     
b. In addition to the amounts that Rodriguez misappropriated via unauthorized 
ACH payments described in paragraph 13 above, between March 2014 and July 2021, Rodriguez 
also misappropriated or misused a total of at least $3 million from the accounts of his Morgan 
Stanley Smith Barney brokerage customers and advisory clients using unauthorized third-party 
wires and cash journal transfers (i.e., internal cash movements between Morgan Stanley Smith 
Barney accounts).  Of that amount, between April 2014 and May 2019, Rodriguez issued at least 
18 unauthorized cash wires totaling over $300,000 from four unrelated Morgan Stanley Smith 
Barney brokerage and advisory accounts to the same external third-party bank account during the 
time in which Morgan Stanley Smith Barney failed to implement procedures reasonably designed 
to prevent and detect this pattern of fraudulent wire activity.   
20. In addition, prior to the Commission’s 2018 Morgan Stanley Smith Barney Order, 
both Carter and Rodriguez misused or misappropriated significant amounts from their respective 
customers and clients via unauthorized wires and/or journals in which they falsified that the 
customer or client had verbally requested the wire or journal.  The 2018 Morgan Stanley Smith 
Barney Order found that Morgan Stanley Smith Barney did not take steps to reasonably monitor its 
FAs initiating third-party wires and journals from client and customer accounts of up to $100,000 

  
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per day per account based on the FA’s attestation of having received a verbal request from the 
client or customer or to detect unauthorized or unusual activity in client accounts under this 
threshold.  Morgan Stanley Smith Barney’s failure to do so in the period prior to the 2018 Morgan 
Stanley Smith Barney Order led to its failure to prevent and detect their misappropriation through 
these unauthorized wires and/or journals.  Morgan Stanley Smith Barney implemented certain 
enhancements to its policies and procedures in 2018.      
21. Through their misappropriation, Carter and Rodriguez violated Section 10(b) of the 
Exchange Act and Rule 10b-5 thereunder and Sections 206(1) and (2) of the Advisers Act.  
Morgan Stanley Smith Barney’s failure reasonably to implement policies and procedures to 
monitor the foregoing types of disbursements from client and customer accounts to external 
accounts led to Morgan Stanley Smith Barney’s failure to prevent and detect their misappropriation 
for years.   
Morgan Stanley Smith Barney’s Discovery of Misappropriation and Remedial Steps 
22. In July 2019, a relative of an advisory client of Carter contacted Morgan Stanley 
Smith Barney raising questions about the client’s account.  Morgan Stanley Smith Barney 
promptly investigated the matter, discovered Carter’s misappropriation from the client’s accounts 
and the accounts of certain of his brokerage customers, terminated Carter, and reported the 
misappropriation to the Commission staff and other law enforcement agencies.  Morgan Stanley 
Smith Barney subsequently entered into settlement agreements with the victimized client and 
customers and compensated them for their losses.   
23. However, it was not until February 2021, after inquiries by Commission staff 
concerning Morgan Stanley Smith Barney’s procedures for detecting unauthorized wires from 
multiple unrelated client and customer accounts to single external third-party accounts, that 
Morgan Stanley Smith Barney discovered that the fraud detection software it began using in 
October 2015 had never been calibrated to monitor this pattern of wire activity.  Morgan Stanley 
Smith Barney reported that discovery to the Commission staff in February 2021.   
24. In July 2021, one of Rodriguez’s brokerage customers reported unauthorized 
activity in the customer’s account.  Morgan Stanley Smith Barney promptly began investigating 
the matter and discovered misappropriation from that account as well as misappropriation from 
multiple other brokerage customers and advisory clients for whom Rodriguez was the FA.  In 
August 2021, Morgan Stanley Smith Barney terminated Rodriguez and reported Rodriguez’s 
misappropriation to the Commission staff and other law enforcement agencies.  Morgan Stanley 
Smith Barney has subsequently entered into settlement agreements with the victimized clients and 
customers, and has compensated them for their losses.   
25. In February 2022, following Morgan Stanley Smith Barney’s discovery of 
Rodriguez’s misappropriation, Morgan Stanley Smith Barney began a retroactive review of the 
payment instructions for externally-initiated ACH payments from the previous five years to 
identify any instances where the beneficiary’s name in the ACH payment instructions matched the 
name of a Morgan Stanley Smith Barney FA.  Morgan Stanley Smith Barney’s retroactive review 
led to the identification of unauthorized ACH payments and other misconduct by McKelvey and 
Chang, as described in paragraph 13.  Morgan Stanley Smith Barney terminated them and reported 

  
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their misconduct to the Commission staff.  Beginning in December 2022, Morgan Stanley Smith 
Barney instituted a written procedure to review externally-initiated ACH payments for name 
matches of FAs on a scheduled basis going forward.  
26. In addition, in July 2022 Morgan Stanley Smith Barney retained an outside 
compliance consultant (the “Consultant”) on a non-privileged basis to perform a review and 
assessment of Morgan Stanley Smith Barney’s control environment and anti-fraud controls for 
third-party payments, identify gaps in its procedures, and recommend enhancements to mitigate the 
risk of internal fraud and ensure compliance with relevant rules and regulations.  After completing 
its review and assessment, in April 2023 the Consultant issued a written report that included 
findings and recommendations for improvements to Morgan Stanley Smith Barney’s control 
environment.  Morgan Stanley Smith Barney reports that it has implemented all of the Consultant’s 
recommended enhancements with the exception of a limited number of remaining enhancements, 
for which it has provided Commission staff with a detailed plan and schedule for their 
implementation.  
Violations and Failure to Supervise 
 
27. As a result of the conduct described above, Morgan Stanley Smith Barney willfully 
violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, which require, among 
other things, that a registered investment adviser adopt and implement written policies and 
procedures reasonably designed to prevent violation of the Advisers Act and the rules thereunder 
by the adviser and its supervised persons.   
 
28. As a result of the conduct described above, Morgan Stanley Smith Barney failed 
reasonably to supervise Carter, Rodriguez, and Chang, within the meaning of Section 203(e)(6) of 
the Advisers Act and Section 15(b)(4)(E) of the Exchange Act, with a view to preventing and 
detecting their violations of Sections 206(1) and 206(2) of the Advisers Act and Section 10(b) of 
the Exchange Act and Rule 10b-5 thereunder.  Morgan Stanley Smith Barney also failed 
reasonably to supervise McKelvey, within the meaning of Section 15(b)(4)(E) of the Exchange 
Act, with a view to preventing his violations of Section 10(b) of the Exchange Act and Rule 10b-5 
thereunder. 
 
Morgan Stanley Smith Barney’s Remedial Efforts  
 
29. In determining to accept the Offer, the Commission considered remedial acts 
promptly undertaken by Respondent and cooperation afforded the Commission staff. 
Undertakings 
30. Respondent has undertaken to: 
 
a. Retention of Compliance Consultant.  Within sixty (60) days after the entry 
of this Order, Morgan Stanley Smith Barney shall engage a consultant not unacceptable to the 
Commission (the “Compliance Consultant”), and provide a copy of this Order to the Compliance 
Consultant.  For purposes of this paragraph 30, the Commission deems the Consultant described in 
paragraph 26 is acceptable to serve as the Compliance Consultant.  No later than ten (10) days 

  
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following the date of the Compliance Consultant’s engagement, Respondent shall provide the 
Commission staff with a copy of the engagement letter detailing the Compliance Consultant’s 
responsibilities, which shall include the reviews and reports to be made by the Compliance 
Consultant as set forth in this Order.  The Compliance Consultant’s compensation and expenses 
shall be borne exclusively by the Respondent.   
 
b. Compliance Consultant’s Reviews.  Respondent shall require the 
Compliance Consultant to:  
(1) Conduct a comprehensive review of all available forms of third-
party cash disbursements from customer and client accounts and Morgan Stanley Smith Barney’s 
policies, procedures and controls for preventing and detecting conversion of client advisory or 
brokerage customer funds by its supervised persons through each available form, including but not 
limited to Morgan Stanley Smith Barney’s implementation of recommendations from the 
Consultant’s April 2023 report described in paragraph 26, and assess whether Morgan Stanley 
Smith Barney is complying with its policies, procedures and controls in effect as of the start date of 
the Compliance Consultant’s engagement, and whether such policies, procedures and controls are 
effective in achieving their stated purpose;   
(2) Submit a written report to Morgan Stanley Smith Barney and the 
Commission staff of its findings and recommendations for changes or enhancements to the 
policies, procedures and controls described in paragraph 30.b.1 and a procedure for implementing 
the recommended changes and enhancements (the “First Report”);  
(3) One year from the date of the issuance of the Compliance 
Consultant’s First Report, conduct an annual review (“Annual Review”) to assess whether Morgan 
Stanley Smith Barney is complying with its then-current policies, procedures and controls, 
including Morgan Stanley Smith Barney’s implementation of recommendations from the 
Compliance Consultant’s First Report, and assess whether Morgan Stanley Smith Barney’s then-
current policies, procedures and controls are effective in achieving their stated purpose; and  
(4) Submit a written report to Morgan Stanley Smith Barney and to the 
Commission staff of its findings and recommendations, if any, for additional changes and 
enhancements to the policies, procedures and controls, and a procedure for implementing the 
changes and enhancements (the “Second Report”).  
c. Compliance Consultant’s Reports.  Morgan Stanley Smith Barney shall 
require the Compliance Consultant to complete its review and issue its First Report within one 
hundred and twenty (120) days after the date of the engagement.  Morgan Stanley Smith Barney 
shall require the Compliance Consultant to issue the Second Report within one hundred and twenty 
(120) days after beginning the Annual Review.  
 
d. Morgan Stanley Smith Barney shall, within ninety (90) days of receipt of 
each of the Compliance Consultant’s reports, adopt all recommendations contained in the reports, 
provided, however, that within thirty (30) days after the date of the applicable report, Respondent 
shall in writing advise the Compliance Consultant and the Commission staff of any 
recommendations that it considers to be unduly burdensome, impractical, or inappropriate.  In the 

  
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event Respondent determines that it is impracticable to adopt a recommendation within ninety (90) 
days solely due to timing, Respondent shall in writing advise the Compliance Consultant and the 
Commission staff as to the reason why timing is impracticable and propose an alternative schedule 
for implementation.  With respect to any recommendation that Respondent otherwise considers to 
be unduly burdensome, impractical, or inappropriate, Respondent need not adopt that 
recommendation at that time but shall instead propose in writing an alternative policy or procedure 
designed to achieve the same objective or purpose as that recommended by the Compliance 
Consultant.  Respondent shall engage in good faith negotiations with the Compliance Consultant in 
an effort to reach agreement on any recommendations objected to by Respondent.  In the event that 
Respondent and the Compliance Consultant are unable to agree on an alternative proposal within 
thirty (30) days, Respondent shall abide by the determinations of the Compliance Consultant.  
e. From the date the Order is instituted and for a period of two years from 
completion of the engagement described in this paragraph 30, Respondent shall not (i) retain the 
Compliance Consultant for any other professional services outside of the services described in this 
Order, and excepting for this purpose for any other existing professional services for which the 
Compliance Consultant has already been retained as of the date of the Order; (ii) enter into any 
other professional relationship with the Compliance Consultant, including any employment, 
consultant, attorney-client, auditing or other professional relationship; or (iii) enter, without prior 
written consent of the Commission staff, into any such professional relationship with any of the 
Compliance Consultant’s present or former affiliates, employers, directors, officers, employees, or 
agents acting in their capacity as such.  
f. The reports by the Compliance Consultant will likely include confidential 
financial, proprietary, competitive business or commercial information.  Public disclosure of the 
reports could discourage cooperation, impede pending or potential government investigations or 
undermine the objectives of the reporting requirement.  For these reasons, among others, the 
reports and the contents thereof are intended to remain and shall remain non-public, except (1) 
pursuant to court order, (2) as agreed to by the parties in writing, (3) to the extent that the 
Commission determines in its sole discretion that disclosure would be in furtherance of the 
Commission’s discharge of its duties and responsibilities, or (4) is otherwise required by law. 
g. Morgan Stanley Smith Barney Certification.  Morgan Stanley Smith Barney 
shall certify, in writing, compliance with the undertakings set forth above.  The certification shall 
identify the undertakings, provide written evidence of compliance in the form of a narrative, and be 
supported by exhibits sufficient to demonstrate compliance.  The Commission staff may make 
reasonable requests for further evidence of compliance, and Morgan Stanley Smith Barney agrees 
to provide such evidence.  The certification and supporting material shall be submitted to Wendy 
Tepperman, Assistant Regional Director, Securities and Exchange Commission, New York 
Regional Office, 100 Pearl St., Suite 20-100, New York, NY 10004-2616, with a copy to the 
Office of Chief Counsel of the Enforcement Division, no later than sixty (60) days from the date of 
the completion of the undertakings. 
h. For good cause shown, the Commission staff may extend any of the 
procedural dates relating to the undertakings.  Deadlines for procedural dates shall be counted in 
calendar days, except that if the last day falls on a weekend or federal holiday, the next business 
day shall be considered to be the last day.  

  
12 
 
IV. 
 
 In view of the foregoing, the Commission deems it appropriate and in the public interest to 
impose the sanctions agreed to in Respondent Morgan Stanley Smith Barney’s Offer. 
 
 Accordingly, pursuant to Sections 15(b) of the Exchange Act and Sections 203(e) and 
203(k) of the Advisers Act, it is hereby ORDERED that: 
 
 A. Respondent cease and desist from committing or causing any violations and any 
future violations of Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. 
 
B. Respondent is censured.   
 
C. Respondent shall comply with the undertakings enumerated in paragraph 30, 
above. 
  
 D. Respondent shall, within 14 days of the entry of this Order, pay a civil money 
penalty in the amount of $15,000,000 to the Securities and Exchange Commission.  The 
Commission may distribute civil money penalties collected in this proceeding if, in its discretion, 
the Commission orders the establishment of a Fair Fund pursuant to 15 U.S.C. § 7246, Section 
308(a) of the Sarbanes-Oxley Act of 2002.  The Commission will hold funds paid pursuant to this 
paragraph in an account at the United States Treasury pending a decision whether the Commission, 
in its discretion, will seek to distribute funds or, subject to Exchange Act Section 21F(g)(3), 
transfer them to the general fund of the United States Treasury.  If timely payment is not made, 
additional interest shall accrue pursuant to 31 U.S.C. §3717.  Payment must be made in one of the 
following ways:  (1) Respondent may transmit payment electronically to the Commission, which 
will provide detailed ACH transfer/Fedwire instructions upon request; (2) Respondent may make 
direct payment from a bank account via Pay.gov through the SEC website at 
http://www.sec.gov/about/offices/ofm.htm; or (3) Respondent may pay by certified check, bank 
cashier’s check, or United States postal money order, made payable to the Securities and Exchange 
Commission and hand-delivered or mailed to:  
 
Enterprise Services Center 
Accounts Receivable Branch 
HQ Bldg., Room 181, AMZ-341 
6500 South MacArthur Boulevard 
Oklahoma City, OK 73169 
 
Payments by check or money order must be accompanied by a cover letter identifying 
Morgan Stanley Smith Barney as the Respondent in these proceedings, and the file number of 
these proceedings; a copy of the cover letter and check or money order must be sent to Tejal Shah, 
Associate Regional Director, Securities and Exchange Commission, New York Regional Office, 
100 Pearl Street, Suite 20-100, New York, NY 10004-2616.  
 
 E. Regardless of whether the Commission in its discretion orders the creation of a 
Fair Fund for the penalties ordered in this proceeding, amounts ordered to be paid as civil money 

  
13 
 
penalties pursuant to this Order shall be treated as penalties paid to the government for all 
purposes, including all tax purposes.  To preserve the deterrent effect of the civil penalty, 
Respondent agrees that in any Related Investor Action, it shall not argue that it is entitled to, nor 
shall it benefit by, offset or reduction of any award of compensatory damages by the amount of any 
part of Respondent’s payment of a civil penalty in this action (“Penalty Offset”).  If the court in 
any Related Investor Action grants such a Penalty Offset, Respondent agrees that it shall, within 30 
days after entry of a final order granting the Penalty Offset, notify the Commission's counsel in this 
action and pay the amount of the Penalty Offset to the Securities and Exchange Commission.  Such 
a payment shall not be deemed an additional civil penalty and shall not be deemed to change the 
amount of the civil penalty imposed in this proceeding.  For purposes of this paragraph, a “Related 
Investor Action” means a private damages action brought against Respondent by or on behalf of 
one or more investors based on substantially the same facts as alleged in the Order instituted by the 
Commission in this proceeding. 
 
 
 By the Commission. 
 
 
 
 
Vanessa A. Countryman 
Secretary 
 
 

1 

 

 

 UNITED STATES OF AMERICA 

 Before the 

 SECURITIES AND EXCHANGE COMMISSION 

 

SECURITIES EXCHANGE ACT OF 1934 

Release No. 101842 / December 9, 2024 

 

INVESTMENT ADVISERS ACT OF 1940 

Release No. 6782 / December 9, 2024 

 

ADMINISTRATIVE PROCEEDING 

File No. 3-22339 

 

 

 

In the Matter of 

 

Morgan Stanley Smith 

Barney LLC,  

 

Respondent. 

 

 

ORDER INSTITUTING 

ADMINISTRATIVE AND CEASE-

AND-DESIST PROCEEDINGS, 

PURSUANT TO SECTION 15(b) OF 

THE SECURITIES EXCHANGE ACT 

OF 1934 AND SECTIONS 203(e) AND 

203(k) OF THE INVESTMENT 

ADVISERS ACT OF 1940, MAKING 

FINDINGS, AND IMPOSING 

REMEDIAL SANCTIONS AND A 

CEASE-AND-DESIST ORDER  

 

 

I. 

 

 The Securities and Exchange Commission (“Commission”) deems it appropriate and in the 

public interest that public administrative and cease-and-desist proceedings be, and hereby are, 

instituted pursuant to Section 15(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and 

Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 (“Advisers Act”) against 

Morgan Stanley Smith Barney LLC (“Morgan Stanley Smith Barney” or “Respondent”).   

 

II. 

 

 In anticipation of the institution of these proceedings, Respondent has submitted an Offer 

of Settlement (the “Offer”) which the Commission has determined to accept.  Solely for the 

purpose of these proceedings and any other proceedings brought by or on behalf of the 

Commission, or to which the Commission is a party, and without admitting or denying the findings 

herein, except as to the Commission’s jurisdiction over it and the subject matter of these 

proceedings, which are admitted, Respondent consents to the entry of this Order Instituting 

Administrative and Cease-and-Desist Proceedings, Pursuant to Section 15(b) of the Securities 

Exchange Act of 1934 and Sections 203(e) and 203(k) of the Investment Advisers Act of 1940, 



  

2 

 

Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as 

set forth below. 

 

III. 

 

 On the basis of this Order and Respondent’s Offer, the Commission finds1 that: 

 

Summary 

 

1. These proceedings arise out of Morgan Stanley Smith Barney’s failure to adopt and 

implement policies and procedures reasonably designed to prevent Morgan Stanley Smith Barney 

personnel from misusing and misappropriating funds from advisory client and brokerage customer 

accounts.  Morgan Stanley Smith Barney applied the same policies, procedures, and systems to 

both brokerage and advisory accounts with respect to third-party disbursements.  Morgan Stanley 

Smith Barney’s inadequate policies and procedures and systems to implement them led to its 

failure reasonably to supervise four of its investment adviser and registered representatives, which 

Morgan Stanley Smith Barney referred to as financial advisors (“FAs”), who misappropriated 

funds from client and customer accounts while employed at Morgan Stanley Smith Barney:  

Michael Carter (“Carter”), Chingyuan “Gary” Chang (“Chang”), Douglas McKelvey 

(“McKelvey”), and Jesus Rodriguez (“Rodriguez”).2 

2. Until at least December 2022, Morgan Stanley Smith Barney failed to adopt and 

implement policies and procedures reasonably designed to prevent and detect misappropriation 

from client and customer accounts by its FAs by means of unauthorized Automated Clearing House 

(“ACH”) payments that were externally initiated.  Morgan Stanley Smith Barney did not have any 

policy or procedure that screened the ACH payment instructions Morgan Stanley Smith Barney 

received from the originating financial institution for the name of the beneficiary of the ACH 

payments, which allowed Rodriguez, McKelvey and Chang to initiate ACH payments to pay their 

own credit card bills or otherwise improperly transfer funds for their own benefit.   

3. In addition, from October 2015 to at least February 2021, Morgan Stanley Smith 

Barney failed to implement policies and procedures reasonably designed to prevent and detect 

misappropriation by its FAs using unauthorized cash wire transfers from multiple unrelated 

customer or client accounts of the same FA to the same third-party external account.  Although 

Morgan Stanley Smith Barney understood such activity was a red flag and in 2015 implemented a 

third-party fraud detection software system that Morgan Stanley Smith Barney mistakenly believed 

 
1  The findings herein are made pursuant to Respondent’s Offer of Settlement and are not 

binding on any other person or entity in this or any other proceeding.  

 
2  The Commission has filed or instituted actions against each of these FAs.  See SEC v. 

Michael Barry Carter, No. 20-cv-02112-CCB (D. Md.) (filed July 20, 2020; final judgment 

entered June 30, 2021); SEC v. Douglas McKelvey, No. 23-cv-00564-O (N.D. Tex.) (filed June 

6, 2023; final judgment entered April 26, 2024); In the Matter of Chingyuan “Gary” Chang, 

Exch. Act Rel. No. 99239 (Dec. 26, 2023) (settled order); SEC v. Jesus Rodriguez (24-cv-00027) 

(W.D. Texas) (pending).   

 



  

3 

 

would, among other things, monitor for such activity, the system had not in fact been designed to 

detect when such patterns of wire activity had occurred.  Moreover, Morgan Stanley Smith Barney 

did not perform testing to validate the use of the system for that purpose at any time over the course 

of the next five years.  Morgan Stanley Smith Barney’s failure reasonably to monitor for this risk 

allowed Carter and Rodriguez to misappropriate from the Morgan Stanley Smith Barney accounts 

of their customers and clients without detection.         

4. By failing to adopt and/or implement written policies and procedures reasonably 

designed to prevent misappropriation by its FAs using unauthorized externally-initiated ACH 

payments and unauthorized cash wires from multiple unrelated client accounts of the same FA to 

the same third-party account, Morgan Stanley Smith Barney willfully3  violated Section 206(4) of 

the Advisers Act and Rule 206(4)-7 thereunder.   

5. Further, Morgan Stanley Smith Barney’s inadequate supervisory policies, 

procedures, and systems for implementation led to its failure to prevent and detect violations of the 

antifraud provisions of the Exchange Act and/or Advisers Act by Carter, Chang, McKelvey, and 

Rodriguez.  As a result, Morgan Stanley Smith Barney failed reasonably to supervise Carter, 

Chang, McKelvey and Rodriguez within the meaning of Section 15(b)(4)(E) of the Exchange Act 

and/or Section 203(e)(6) of the Advisers Act. 

Respondent 

 

6. Morgan Stanley Smith Barney is a Delaware limited liability company with its 

principal place of business in Purchase, New York.  Morgan Stanley Smith Barney has been 

registered with the Commission as both a broker-dealer and investment adviser since May 2009.  

Morgan Stanley Smith Barney is an indirect wholly-owned subsidiary of Morgan Stanley, a 

Delaware Corporation that has a principal office in New York, New York.  On June 29, 2018, the 

Commission issued a settled Order Instituting Administrative and Cease-and-Desist Proceedings 

against Morgan Stanley Smith Barney finding that Morgan Stanley Smith Barney willfully violated 

Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder by failing to adopt policies and 

procedures reasonably designed to prevent Morgan Stanley Smith Barney’s personnel from 

misusing and misappropriating funds in client accounts and that Morgan Stanley Smith Barney 

failed reasonably to supervise former Morgan Stanley Smith Barney FA Barry Connell within the 

meaning of Section 203(e)(6) of the Advisers Act, who had initiated over $7 million in unauthorized 

transactions out of advisory client accounts primarily by making false attestations that he had 

 
3 “Willfully,” for purposes of imposing relief under Section 15(b) of the Exchange Act and 

Section 203(e) of the Advisers Act, “‘means no more than that the person charged with the duty  

knows what he is doing.’”  Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (quoting 

Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949)).  There is no requirement that the actor 

“also be aware that he is violating one of the Rules or Acts.” Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 

1965).  The decision in The Robare Group, Ltd. v. SEC, which construed the term “willfully” for 

purposes of a differently structured statutory provision, does not alter that standard.  922 F.3d 

468, 478-79 (D.C. Cir. 2019) (setting forth the showing required to establish that a person has 

“willfully omit[ted]” material information from a required disclosure in violation of Section 207 

of the Advisers Act). 

 



  

4 

 

received verbal requests from the clients for third-party wires and cash journals in approximately 90 

instances between December 2015 and November 2016.  See In the Matter of Morgan Stanley Smith 

Barney LLC, Exch. Act Rel. No. 83571 (June 29, 2018) (the “2018 Morgan Stanley Smith Barney 

Order”).  

 

Facts 

 

7. Morgan Stanley Smith Barney’s FAs provide services to both Morgan Stanley 

Smith Barney’s investment advisory clients and its brokerage customers.  Morgan Stanley Smith 

Barney applies the same policies, procedures, and systems to both brokerage and advisory accounts 

with respect to third-party disbursements.  Carter, Chang, McKelvey and Rodriguez, collectively, 

misappropriated millions of dollars from customer and client accounts primarily through two forms 

of third-party disbursements: unauthorized ACH payments and unauthorized wire transfers. 

8. As a registered investment adviser, Morgan Stanley Smith Barney is subject to Rule 

206(4)-7 under the Advisers Act, known as the compliance rule.  Among other things, the 

compliance rule requires advisers to adopt and implement written policies and procedures 

reasonably designed to prevent violations of the Advisers Act and the rules thereunder by the firm 

and its supervised persons.  As noted in the adopting release for the compliance rule, the 

Commission stated its expectation that an adviser’s policies and procedures at a minimum would 

address a number of items, including “[s]afeguarding of client assets from conversion or 

inappropriate use by advisory personnel.”   

9. In addition, the Commission has repeatedly emphasized that the duty to supervise 

for broker-dealers and investment advisers is a critical component of the federal regulatory scheme.  

In the Matter of Signator Investors, Inc., et al., Exch. Act Rel. No. 75670, 2015 WL 4760909 at *8 

(August 13, 2015) (settled order). 

Morgan Stanley Smith Barney Failed to Adopt and Implement Policies and Procedures 

Reasonably Designed to Prevent and Detect Unauthorized Externally-Initiated ACH Payments  

10. Morgan Stanley Smith Barney offers its brokerage customers and advisory clients 

the ability to transfer cash from their Morgan Stanley Smith Barney accounts to outside parties 

using a variety of methods, including ACH payments.  The ACH system is a nationwide payment 

network through which financial institutions accumulate and send each other electronic cash 

transfers.  The ACH system is commonly used to allow customers of financial institutions to 

transfer cash for such purposes as online bill payments and money transfers.  In simple terms, an 

externally-initiated ACH payment involves a customer of another financial institution (the 

“originating financial institution”) initiating payment instructions to request and obtain payment 

from a particular account at the financial institution receiving the payment instruction (the 

“receiving financial institution”).  The originating financial institution transmits the payment 

instructions to the receiving financial institution as part of batches using the ACH system.  Morgan 

Stanley Smith Barney failed to adopt and implement policies and procedures reasonably designed 

to prevent and detect unauthorized ACH payments from client and customer accounts where 

Morgan Stanley Smith Barney was the receiving financial institution in an externally-initiated 

ACH transaction.   



  

5 

 

11. ACH payments, like other methods of transferring funds to outside parties, pose 

fraud risks to broker-dealers and investment advisers that offer the service, including the risk of 

misappropriation by supervised persons.  Morgan Stanley Smith Barney FAs assigned to Morgan 

Stanley Smith Barney customer and client accounts have ready access to all the account 

information necessary to initiate unauthorized externally-initiated ACH payments to debit those 

customer or client accounts, such as name of the account owner, routing number and account 

number.  However, Morgan Stanley Smith Barney’s fraud prevention procedures were not 

reasonably designed to address this risk of misappropriation.   

12. ACH payment instructions from an originating financial institution to Morgan 

Stanley Smith Barney as the receiving financial institution include details such as dollar amount to 

be credited or debited, account and routing numbers at the receiving financial institution, and in 

many instances, the name of the beneficiary of the account at the originating financial institution.  

Morgan Stanley Smith Barney had no procedures for monitoring externally-initiated ACH 

payment instructions for indications of internal fraud, and did not take steps to screen ACH 

payment instructions it received from originating financial institutions to detect instances in which 

a Morgan Stanley Smith Barney FA servicing the account was the beneficiary of the ACH 

payment it debited from a Morgan Stanley Smith Barney customer or client account.   

13. Morgan Stanley Smith Barney’s failure to adopt and implement policies and 

procedures reasonably designed to address externally-initiated ACH payments led to its failure to 

prevent and detect misappropriation by three FAs:  Rodriguez, McKelvey, and Chang.  Over a 

seven-year period, these three FAs misappropriated a total of more than $1.7 million through 

unauthorized externally-initiated ACH payments.  In hundreds of instances between May 2015 and 

July 2022, Morgan Stanley Smith Barney debited its brokerage customer and advisory client 

accounts for unauthorized externally-initiated ACH payments based on the ACH payment 

instructions it received that included a payment beneficiary name that matched the name of one of 

these FAs assigned to the Morgan Stanley Smith Barney account.  These ACH payments were 

typically to pay the FA’s credit card bill or to transfer funds to the FA’s account at an online 

payment application.  Specifically:  

a. Between November 2018 and July 2021, Rodriguez made approximately 

185 unauthorized ACH payments from accounts of his Morgan Stanley Smith Barney clients and 

customers while he was employed as a registered representative and investment adviser 

representative in Morgan Stanley Smith Barney’s El Paso, TX office.  These transfers totaled over 

$575,000 and were primarily to make payments to his credit cards, car loan and online payment 

accounts.  For approximately 83 of these unauthorized ACH payments, the ACH payment 

instructions received by Morgan Stanley Smith Barney identified Rodriguez or some similar variant 

of his name as the beneficiary of the payment.   

b. Between May 2015 and February 2022, McKelvey made more than 250 

unauthorized ACH payments from the Morgan Stanley Smith Barney accounts of two elderly 

relatives who were brokerage customers while he was employed as a registered representative and 

investment adviser representative in Morgan Stanley Smith Barney’s Southlake, TX office.  These 

transfers totaled over $1.15 million and were primarily to pay his and his wife’s credit cards.  For 

virtually all of these unauthorized ACH payments, the ACH payment instructions received by 

Morgan Stanley Smith Barney identified McKelvey or his wife as the beneficiary of the payment.   



  

6 

 

c. Between September 2021 and July 2022, Chang made approximately 40 

unauthorized ACH payments from four customer and/or client accounts while employed as a 

registered representative and investment adviser representative in Morgan Stanley Smith Barney’s 

Cupertino, CA office.  These transfers totaled over $58,000 and were primarily issued to online 

payment application accounts belonging to Chang.  For virtually all of these unauthorized ACH 

payments, the ACH payment instructions received by Morgan Stanley Smith Barney identified 

Chang as the beneficiary of the payment. 

14. Through their misappropriation of advisory client and brokerage customer funds 

using unauthorized externally-initiated ACH payments, each of the three former Morgan Stanley 

Smith Barney FAs violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and/or 

Sections 206(1) and (2) of the Advisers Act.  Morgan Stanley Smith Barney’s failure to adopt and 

implement policies and procedures reasonably designed to address externally-initiated ACH 

payments led to Morgan Stanley Smith Barney’s failure to prevent and detect these FAs’ 

misappropriation for years.   

15. As discussed in paragraph 25 below, in February 2022 Morgan Stanley Smith 

Barney began a retroactive review of externally-initiated ACH payments, which ultimately 

identified the unauthorized ACH payments by McKelvey and Chang.   

Morgan Stanley Smith Barney Failed to Implement Policies and Procedures Reasonably 

Designed to Prevent and Detect Unauthorized Cash Wires  

16. From at least October 2015 to at least February 2021, Morgan Stanley Smith 

Barney failed to implement policies and procedures reasonably designed to prevent and detect 

misappropriation by its FAs using unauthorized cash wire transfers from multiple unrelated client 

or customer accounts of the FA to the same third-party external account.    

17. In June 2015, the Financial Industry Regulatory Authority (“FINRA”) issued a 

Letter of Acceptance, Waiver and Consent4 in which it found that from at least June 2009 through 

November 2014, Morgan Stanley Smith Barney had failed to establish, maintain and enforce 

supervisory systems and written procedures that were reasonably designed to review and monitor 

the transmittal of funds from customer accounts, including by failing to review and monitor 

outgoing wire transfers and branch checks disbursed from multiple customer accounts to the same 

third-party account.  FINRA found further that as a result, between October 2008 and June 2013, 

three Morgan Stanley Smith Barney registered representatives in two different branch offices were 

able to convert, collectively, almost $500,000 from thirteen brokerage customer accounts through 

fraudulent wires and branch checks sent from the customers’ accounts to third-party accounts.  

Morgan Stanley Smith Barney represented to FINRA that it implemented a manual report to 

address those deficiencies in December 2014.   

18. Morgan Stanley Smith Barney ran and reviewed this manual report monthly for 

both client advisory and customer brokerage accounts from December 2014 until October 2015.  In 

October 2015, Morgan Stanley Smith Barney began using third-party fraud detection software to 

 
4 Financial Industry Regulatory Authority Letter of Acceptance, Waiver and Consent, No. 

2011025479301 (June 19, 2015).  



  

7 

 

monitor wires to external accounts in real time for potential fraud by assigning a risk score to each 

wire.  Based on a calibration report it received from the third-party software provider, Morgan 

Stanley Smith Barney believed that the software would detect and alert Morgan Stanley Smith 

Barney personnel to suspicious cash transfers from multiple unrelated brokerage customer or 

advisory client accounts to single third-party accounts, and based on this belief, Morgan Stanley 

Smith Barney discontinued running the manual report at that time.  However, the software was not 

in fact calibrated to detect this pattern of activity, and Morgan Stanley Smith Barney’s own 

compliance documentation from 2019 did not indicate that this pattern of activity was a parameter 

included among the payment activities the software was configured to monitor.  Moreover, 

Morgan Stanley Smith Barney never conducted any testing of the software system’s performance 

in monitoring this pattern of wire activity in the years that followed, which might have alerted 

Morgan Stanley Smith Barney to the fact that the system was not performing such surveillance.  In 

fact, Morgan Stanley Smith Barney did not identify this gap in its surveillance procedures until 

February 2021 after the Commission staff’s inquiry.   

19. Morgan Stanley Smith Barney’s failure to implement policies and procedures 

reasonably designed to monitor this known risk led to its failure to prevent and detect Carter’s and 

Rodriguez’s misappropriation through unauthorized wires from multiple brokerage and advisory 

accounts to single external accounts at a third-party financial institution for their own benefit for a 

period spanning years.  Specifically: 

a. Between October 2007 and May 2019, Carter misappropriated over $6 

million dollars from four brokerage customers and an investment advisory client while he was 

employed as a registered representative and investment adviser representative at Morgan Stanley 

Smith Barney.  Of that amount, Carter issued at least 54 unauthorized cash wires totaling over $4.5 

million from four unrelated Morgan Stanley Smith Barney advisory and brokerage accounts to the 

same external account at a third-party bank during the time in which Morgan Stanley Smith Barney 

failed to implement procedures reasonably designed to prevent and detect this pattern of fraudulent 

wire activity.     

b. In addition to the amounts that Rodriguez misappropriated via unauthorized 

ACH payments described in paragraph 13 above, between March 2014 and July 2021, Rodriguez 

also misappropriated or misused a total of at least $3 million from the accounts of his Morgan 

Stanley Smith Barney brokerage customers and advisory clients using unauthorized third-party 

wires and cash journal transfers (i.e., internal cash movements between Morgan Stanley Smith 

Barney accounts).  Of that amount, between April 2014 and May 2019, Rodriguez issued at least 

18 unauthorized cash wires totaling over $300,000 from four unrelated Morgan Stanley Smith 

Barney brokerage and advisory accounts to the same external third-party bank account during the 

time in which Morgan Stanley Smith Barney failed to implement procedures reasonably designed 

to prevent and detect this pattern of fraudulent wire activity.   

20. In addition, prior to the Commission’s 2018 Morgan Stanley Smith Barney Order, 

both Carter and Rodriguez misused or misappropriated significant amounts from their respective 

customers and clients via unauthorized wires and/or journals in which they falsified that the 

customer or client had verbally requested the wire or journal.  The 2018 Morgan Stanley Smith 

Barney Order found that Morgan Stanley Smith Barney did not take steps to reasonably monitor its 

FAs initiating third-party wires and journals from client and customer accounts of up to $100,000 



  

8 

 

per day per account based on the FA’s attestation of having received a verbal request from the 

client or customer or to detect unauthorized or unusual activity in client accounts under this 

threshold.  Morgan Stanley Smith Barney’s failure to do so in the period prior to the 2018 Morgan 

Stanley Smith Barney Order led to its failure to prevent and detect their misappropriation through 

these unauthorized wires and/or journals.  Morgan Stanley Smith Barney implemented certain 

enhancements to its policies and procedures in 2018.      

21. Through their misappropriation, Carter and Rodriguez violated Section 10(b) of the 

Exchange Act and Rule 10b-5 thereunder and Sections 206(1) and (2) of the Advisers Act.  

Morgan Stanley Smith Barney’s failure reasonably to implement policies and procedures to 

monitor the foregoing types of disbursements from client and customer accounts to external 

accounts led to Morgan Stanley Smith Barney’s failure to prevent and detect their misappropriation 

for years.   

Morgan Stanley Smith Barney’s Discovery of Misappropriation and Remedial Steps 

22. In July 2019, a relative of an advisory client of Carter contacted Morgan Stanley 

Smith Barney raising questions about the client’s account.  Morgan Stanley Smith Barney 

promptly investigated the matter, discovered Carter’s misappropriation from the client’s accounts 

and the accounts of certain of his brokerage customers, terminated Carter, and reported the 

misappropriation to the Commission staff and other law enforcement agencies.  Morgan Stanley 

Smith Barney subsequently entered into settlement agreements with the victimized client and 

customers and compensated them for their losses.   

23. However, it was not until February 2021, after inquiries by Commission staff 

concerning Morgan Stanley Smith Barney’s procedures for detecting unauthorized wires from 

multiple unrelated client and customer accounts to single external third-party accounts, that 

Morgan Stanley Smith Barney discovered that the fraud detection software it began using in 

October 2015 had never been calibrated to monitor this pattern of wire activity.  Morgan Stanley 

Smith Barney reported that discovery to the Commission staff in February 2021.   

24. In July 2021, one of Rodriguez’s brokerage customers reported unauthorized 

activity in the customer’s account.  Morgan Stanley Smith Barney promptly began investigating 

the matter and discovered misappropriation from that account as well as misappropriation from 

multiple other brokerage customers and advisory clients for whom Rodriguez was the FA.  In 

August 2021, Morgan Stanley Smith Barney terminated Rodriguez and reported Rodriguez’s 

misappropriation to the Commission staff and other law enforcement agencies.  Morgan Stanley 

Smith Barney has subsequently entered into settlement agreements with the victimized clients and 

customers, and has compensated them for their losses.   

25. In February 2022, following Morgan Stanley Smith Barney’s discovery of 

Rodriguez’s misappropriation, Morgan Stanley Smith Barney began a retroactive review of the 

payment instructions for externally-initiated ACH payments from the previous five years to 

identify any instances where the beneficiary’s name in the ACH payment instructions matched the 

name of a Morgan Stanley Smith Barney FA.  Morgan Stanley Smith Barney’s retroactive review 

led to the identification of unauthorized ACH payments and other misconduct by McKelvey and 

Chang, as described in paragraph 13.  Morgan Stanley Smith Barney terminated them and reported 



  

9 

 

their misconduct to the Commission staff.  Beginning in December 2022, Morgan Stanley Smith 

Barney instituted a written procedure to review externally-initiated ACH payments for name 

matches of FAs on a scheduled basis going forward.  

26. In addition, in July 2022 Morgan Stanley Smith Barney retained an outside 

compliance consultant (the “Consultant”) on a non-privileged basis to perform a review and 

assessment of Morgan Stanley Smith Barney’s control environment and anti-fraud controls for 

third-party payments, identify gaps in its procedures, and recommend enhancements to mitigate the 

risk of internal fraud and ensure compliance with relevant rules and regulations.  After completing 

its review and assessment, in April 2023 the Consultant issued a written report that included 

findings and recommendations for improvements to Morgan Stanley Smith Barney’s control 

environment.  Morgan Stanley Smith Barney reports that it has implemented all of the Consultant’s 

recommended enhancements with the exception of a limited number of remaining enhancements, 

for which it has provided Commission staff with a detailed plan and schedule for their 

implementation.  

Violations and Failure to Supervise 

 

27. As a result of the conduct described above, Morgan Stanley Smith Barney willfully 

violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, which require, among 

other things, that a registered investment adviser adopt and implement written policies and 

procedures reasonably designed to prevent violation of the Advisers Act and the rules thereunder 

by the adviser and its supervised persons.   

 

28. As a result of the conduct described above, Morgan Stanley Smith Barney failed 

reasonably to supervise Carter, Rodriguez, and Chang, within the meaning of Section 203(e)(6) of 

the Advisers Act and Section 15(b)(4)(E) of the Exchange Act, with a view to preventing and 

detecting their violations of Sections 206(1) and 206(2) of the Advisers Act and Section 10(b) of 

the Exchange Act and Rule 10b-5 thereunder.  Morgan Stanley Smith Barney also failed 

reasonably to supervise McKelvey, within the meaning of Section 15(b)(4)(E) of the Exchange 

Act, with a view to preventing his violations of Section 10(b) of the Exchange Act and Rule 10b-5 

thereunder. 

 

Morgan Stanley Smith Barney’s Remedial Efforts  

 

29. In determining to accept the Offer, the Commission considered remedial acts 

promptly undertaken by Respondent and cooperation afforded the Commission staff. 

Undertakings 

30. Respondent has undertaken to: 

 

a. Retention of Compliance Consultant.  Within sixty (60) days after the entry 

of this Order, Morgan Stanley Smith Barney shall engage a consultant not unacceptable to the 

Commission (the “Compliance Consultant”), and provide a copy of this Order to the Compliance 

Consultant.  For purposes of this paragraph 30, the Commission deems the Consultant described in 

paragraph 26 is acceptable to serve as the Compliance Consultant.  No later than ten (10) days 



  

10 

 

following the date of the Compliance Consultant’s engagement, Respondent shall provide the 

Commission staff with a copy of the engagement letter detailing the Compliance Consultant’s 

responsibilities, which shall include the reviews and reports to be made by the Compliance 

Consultant as set forth in this Order.  The Compliance Consultant’s compensation and expenses 

shall be borne exclusively by the Respondent.   

 

b. Compliance Consultant’s Reviews.  Respondent shall require the 

Compliance Consultant to:  

(1) Conduct a comprehensive review of all available forms of third-

party cash disbursements from customer and client accounts and Morgan Stanley Smith Barney’s 

policies, procedures and controls for preventing and detecting conversion of client advisory or 

brokerage customer funds by its supervised persons through each available form, including but not 

limited to Morgan Stanley Smith Barney’s implementation of recommendations from the 

Consultant’s April 2023 report described in paragraph 26, and assess whether Morgan Stanley 

Smith Barney is complying with its policies, procedures and controls in effect as of the start date of 

the Compliance Consultant’s engagement, and whether such policies, procedures and controls are 

effective in achieving their stated purpose;   

(2) Submit a written report to Morgan Stanley Smith Barney and the 

Commission staff of its findings and recommendations for changes or enhancements to the 

policies, procedures and controls described in paragraph 30.b.1 and a procedure for implementing 

the recommended changes and enhancements (the “First Report”);  

(3) One year from the date of the issuance of the Compliance 

Consultant’s First Report, conduct an annual review (“Annual Review”) to assess whether Morgan 

Stanley Smith Barney is complying with its then-current policies, procedures and controls, 

including Morgan Stanley Smith Barney’s implementation of recommendations from the 

Compliance Consultant’s First Report, and assess whether Morgan Stanley Smith Barney’s then-

current policies, procedures and controls are effective in achieving their stated purpose; and  

(4) Submit a written report to Morgan Stanley Smith Barney and to the 

Commission staff of its findings and recommendations, if any, for additional changes and 

enhancements to the policies, procedures and controls, and a procedure for implementing the 

changes and enhancements (the “Second Report”).  

c. Compliance Consultant’s Reports.  Morgan Stanley Smith Barney shall 

require the Compliance Consultant to complete its review and issue its First Report within one 

hundred and twenty (120) days after the date of the engagement.  Morgan Stanley Smith Barney 

shall require the Compliance Consultant to issue the Second Report within one hundred and twenty 

(120) days after beginning the Annual Review.  

 

d. Morgan Stanley Smith Barney shall, within ninety (90) days of receipt of 

each of the Compliance Consultant’s reports, adopt all recommendations contained in the reports, 

provided, however, that within thirty (30) days after the date of the applicable report, Respondent 

shall in writing advise the Compliance Consultant and the Commission staff of any 

recommendations that it considers to be unduly burdensome, impractical, or inappropriate.  In the 



  

11 

 

event Respondent determines that it is impracticable to adopt a recommendation within ninety (90) 

days solely due to timing, Respondent shall in writing advise the Compliance Consultant and the 

Commission staff as to the reason why timing is impracticable and propose an alternative schedule 

for implementation.  With respect to any recommendation that Respondent otherwise considers to 

be unduly burdensome, impractical, or inappropriate, Respondent need not adopt that 

recommendation at that time but shall instead propose in writing an alternative policy or procedure 

designed to achieve the same objective or purpose as that recommended by the Compliance 

Consultant.  Respondent shall engage in good faith negotiations with the Compliance Consultant in 

an effort to reach agreement on any recommendations objected to by Respondent.  In the event that 

Respondent and the Compliance Consultant are unable to agree on an alternative proposal within 

thirty (30) days, Respondent shall abide by the determinations of the Compliance Consultant.  

e. From the date the Order is instituted and for a period of two years from 

completion of the engagement described in this paragraph 30, Respondent shall not (i) retain the 

Compliance Consultant for any other professional services outside of the services described in this 

Order, and excepting for this purpose for any other existing professional services for which the 

Compliance Consultant has already been retained as of the date of the Order; (ii) enter into any 

other professional relationship with the Compliance Consultant, including any employment, 

consultant, attorney-client, auditing or other professional relationship; or (iii) enter, without prior 

written consent of the Commission staff, into any such professional relationship with any of the 

Compliance Consultant’s present or former affiliates, employers, directors, officers, employees, or 

agents acting in their capacity as such.  

f. The reports by the Compliance Consultant will likely include confidential 

financial, proprietary, competitive business or commercial information.  Public disclosure of the 

reports could discourage cooperation, impede pending or potential government investigations or 

undermine the objectives of the reporting requirement.  For these reasons, among others, the 

reports and the contents thereof are intended to remain and shall remain non-public, except (1) 

pursuant to court order, (2) as agreed to by the parties in writing, (3) to the extent that the 

Commission determines in its sole discretion that disclosure would be in furtherance of the 

Commission’s discharge of its duties and responsibilities, or (4) is otherwise required by law. 

g. Morgan Stanley Smith Barney Certification.  Morgan Stanley Smith Barney 

shall certify, in writing, compliance with the undertakings set forth above.  The certification shall 

identify the undertakings, provide written evidence of compliance in the form of a narrative, and be 

supported by exhibits sufficient to demonstrate compliance.  The Commission staff may make 

reasonable requests for further evidence of compliance, and Morgan Stanley Smith Barney agrees 

to provide such evidence.  The certification and supporting material shall be submitted to Wendy 

Tepperman, Assistant Regional Director, Securities and Exchange Commission, New York 

Regional Office, 100 Pearl St., Suite 20-100, New York, NY 10004-2616, with a copy to the 

Office of Chief Counsel of the Enforcement Division, no later than sixty (60) days from the date of 

the completion of the undertakings. 

h. For good cause shown, the Commission staff may extend any of the 

procedural dates relating to the undertakings.  Deadlines for procedural dates shall be counted in 

calendar days, except that if the last day falls on a weekend or federal holiday, the next business 

day shall be considered to be the last day.  



  

12 

 

IV. 

 

 In view of the foregoing, the Commission deems it appropriate and in the public interest to 

impose the sanctions agreed to in Respondent Morgan Stanley Smith Barney’s Offer. 

 

 Accordingly, pursuant to Sections 15(b) of the Exchange Act and Sections 203(e) and 

203(k) of the Advisers Act, it is hereby ORDERED that: 

 

 A. Respondent cease and desist from committing or causing any violations and any 

future violations of Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. 

 

B. Respondent is censured.   

 

C. Respondent shall comply with the undertakings enumerated in paragraph 30, 

above. 

  

 D. Respondent shall, within 14 days of the entry of this Order, pay a civil money 

penalty in the amount of $15,000,000 to the Securities and Exchange Commission.  The 

Commission may distribute civil money penalties collected in this proceeding if, in its discretion, 

the Commission orders the establishment of a Fair Fund pursuant to 15 U.S.C. § 7246, Section 

308(a) of the Sarbanes-Oxley Act of 2002.  The Commission will hold funds paid pursuant to this 

paragraph in an account at the United States Treasury pending a decision whether the Commission, 

in its discretion, will seek to distribute funds or, subject to Exchange Act Section 21F(g)(3), 

transfer them to the general fund of the United States Treasury.  If timely payment is not made, 

additional interest shall accrue pursuant to 31 U.S.C. §3717.  Payment must be made in one of the 

following ways:  (1) Respondent may transmit payment electronically to the Commission, which 

will provide detailed ACH transfer/Fedwire instructions upon request; (2) Respondent may make 

direct payment from a bank account via Pay.gov through the SEC website at 

http://www.sec.gov/about/offices/ofm.htm; or (3) Respondent may pay by certified check, bank 

cashier’s check, or United States postal money order, made payable to the Securities and Exchange 

Commission and hand-delivered or mailed to:  

 

Enterprise Services Center 

Accounts Receivable Branch 

HQ Bldg., Room 181, AMZ-341 

6500 South MacArthur Boulevard 

Oklahoma City, OK 73169 

 

Payments by check or money order must be accompanied by a cover letter identifying 

Morgan Stanley Smith Barney as the Respondent in these proceedings, and the file number of 

these proceedings; a copy of the cover letter and check or money order must be sent to Tejal Shah, 

Associate Regional Director, Securities and Exchange Commission, New York Regional Office, 

100 Pearl Street, Suite 20-100, New York, NY 10004-2616.  

 

 E. Regardless of whether the Commission in its discretion orders the creation of a 

Fair Fund for the penalties ordered in this proceeding, amounts ordered to be paid as civil money 

http://www.sec.gov/about/offices/ofm.htm


  

13 

 

penalties pursuant to this Order shall be treated as penalties paid to the government for all 

purposes, including all tax purposes.  To preserve the deterrent effect of the civil penalty, 

Respondent agrees that in any Related Investor Action, it shall not argue that it is entitled to, nor 

shall it benefit by, offset or reduction of any award of compensatory damages by the amount of any 

part of Respondent’s payment of a civil penalty in this action (“Penalty Offset”).  If the court in 

any Related Investor Action grants such a Penalty Offset, Respondent agrees that it shall, within 30 

days after entry of a final order granting the Penalty Offset, notify the Commission's counsel in this 

action and pay the amount of the Penalty Offset to the Securities and Exchange Commission.  Such 

a payment shall not be deemed an additional civil penalty and shall not be deemed to change the 

amount of the civil penalty imposed in this proceeding.  For purposes of this paragraph, a “Related 

Investor Action” means a private damages action brought against Respondent by or on behalf of 

one or more investors based on substantially the same facts as alleged in the Order instituted by the 

Commission in this proceeding. 

 

 

 By the Commission. 

 

 

 

 

Vanessa A. Countryman 

Secretary