[Photo: Father and Son / Guideposts.org]

by Howard Haykin

Over a 3-month period, a veteran Morgan Stanley Broker accepted trade instructions on at least 10 occasions from the son (Junior) of one of his customers (Senior) - for execution in Senior's account. Broker apparently thought that Junior was an authorized third-party on his father's brokerage account - but Senior had never authorized Broker to accept instructions from his son. 

Not by coincidence, Junior, who was employed in financial services, maintained his own personal brokerage account with Broker. Further, it's likely that all 3 men jointly discussed investments - and perhaps led Junior and Senior to buy and hold the same securities.

Which might explain, in part, why Junior called in trades instructions for Senior's account, and why Broker accepted those orders. Of course, Broker should have known better. After all, he had 25 years' experience and held advanced securities licenses – including General Securities Principal (Series 24) and Registered Options Principal (Series 4).  

Yet, there’s no explanation for why Broker ’dug a deeper hole for himself’ by not being entirely truthful when initially questioned by Morgan Stanley about those trades.  This led the firm to terminate Broker’s employment - and he has not yet associated with another broker-dealer.

INVESTOR TAKEAWAY.    This case illustrates why investors need to monitor their own brokerage or advisory accounts - or if unable, they should hire a reliable and independent financial watchdog to perform that function. It’s simply not enough to rely on one's broker, or one's brokerage firm, or industry regulators to monitor for violations and misconduct. 

While the securities industry strictly regulates third-party authorizations, mistakes do happen - as they did in this case - and oversight is often too-little-too-late. Which means that unauthorized third-parties can illegally or improperly gain access to others' accounts and withdraw financial assets before the misconduct is discovered.

[For further details, click on … FINRA Case #2018057649201.]