Promises of unrealistic returns and unsuitable investment strategies ultimately will cost Morgan Stanley $7.2 million. The Financial Industry Regulatory Authority (FINRA) announced the multimillion-dollar decision on March 25,when it ruled in favor of 90 Rochester, New York-area retirees from Eastman Kodak and Xerox Corp. who said the brokerage firm had encouraged them to take early retirement and open accounts that ultimately wiped out much of their life savings.
FINRA’s decision includes a $3 million fine, plus $4.2 million in restitution. In addition, the regulatory agency permanently barred former Morgan Stanley broker Michael Kazacos from doing business in the securities industry, as well as charged former Morgan Stanley broker David Isabella with misconduct. Ira. S. Miller, who managed Isabella and Kazacos, was suspended from acting in a principal capacity for one year and fined $50,000.
According to a statement by FINRA, from 1998 through 2003, Kazacos was able to persuade dozens of Kodak and Xerox retirees and potential retirees to invest their retirement assets with him by promising 10% annual returns and the ability for investors to satisfy their income needs by withdrawing a similar percentage for living expenses each year without reducing their principal. Kazacos’ statements not only encouraged individuals to move their retirement accounts to Morgan Stanley, but also caused some to retire sooner than they might have otherwise.
FINRA also found that once Kazacos did begin to service the retirement accounts, he implemented unsuitable investment strategies that exposed investors to greater risks, especially in a market downturn. As a result, the principal in many accounts was significantly reduced. Specifically, Kazacos put many clients into mutual funds, with an unsuitably high concentration in equity funds. The broker also recommended unsuitable variable annuity transactions, according to FINRA’s formal disciplinary complaint.
During the period that the misconduct allegedly occurred, Kazacos and Isabella generated about $15.4 million in gross commissions from soliciting investments with Morgan Stanley, FINRA said.
To read FINRA’s press release on the Morgan Stanley ruling, go to: http://www.finra.org/Newsroom/NewsReleases/2009/P118270.
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