ARCHIV: Die Zentrale der US-Investmentbank Morgen Stanley in New York City (USA) (Foto vom 16.03.09). Die amerikanische Bank Morgan Stanley hat im Zusammenhang mit dem Boersengang von Facebook einer Strafe von fuenf Millionen Dollar an die Boersenaufsicht von Massachusetts zugestimmt. Die Boersenaufsicht des US-Staates warf der Bank vor, niedrigere Umsatzzahlen nur einigen Analysten und nicht der Oeffentlichkeit zugaenglich gemacht zu haben. Morgan Stanley raeumte keine Schuld ein, stimmte jedoch der Zahlung zu. (zu dapd-Text) Foto: Michael Kappeler/dapd
AP/Michael Kappeler
By Trevor Hunnicutt

Morgan Stanley (MS) has agreed to pay a $100,000 fine to New Jersey state securities regulators for selling exotic exchange-traded funds to unwary investors, state officials said on Tuesday.

The New Jersey Bureau of Securities says improperly trained Morgan Stanley financial advisers sold non-traditional funds, such as leveraged and inverse ETFs, to elderly investors seeking investments that would provide income. The investments resulted in losses for those clients, regulators said.

In a statement, Morgan Stanley said they were "pleased" to reach a resolution.

"The settlement covers the period of January 2007 to June 2009, and Morgan Stanley revamped its processes regarding these products over 4 years ago," the statement read.

Leveraged and inverse ETFs use derivatives and debt to magnify market returns. They are designed to deliver amplified returns in the short run and can deviate substantially from the benchmarks over longer time periods. Because many of the funds reset on a daily basis, they can radically differ from the performance of their underlying benchmark.

In a statement, Abbe R. Tiger, Chief of the New Jersey Bureau of Securities, said investigators "found that Morgan Stanley's staff lacked proper training about non-traditional ETFs, and that the company failed to adequately supervise its personnel handling ETF transactions, to the detriment of investors."

There are 257 leverage and inverse ETFs on the market with a market capitalization of $35.44 billion, according to XTF, a fund data service.

Both products are the subject of litigation and warnings from regulators. In 2009, the U.S. Securities and Exchange Commission issued an alert that advised buy-and-hold investors about the "extra risks" posed by leveraged and inverse ETFs.

Last week a federal appeals court rejected a lawsuit challenging ProShares Advisors LLC's disclosures of the risks of holding 44 of its leveraged ETFs.

Morgan Stanley's payment includes $65,000 in civil penalties, $25,000 to reimburse the state's investigative costs and $10,000 for the state bureau to use for investor education. Morgan Stanley has already paid nearly $96,940 in restitution to New Jersey investors.

In April 2012, Morgan Stanley consented with Wall Street's industry funded watchdog, the Financial Industry Regulatory Authority, to nearly $2.4 million in fines and restitution connected with the non-traditional ETFs.

Dev Modi, a securities arbitration lawyer in Florham Park, New Jersey, who represents investors, said the fines were likely to bring more attention and possibly litigation on the risks of exotic securities.

"Some of these non-traditional ETFs have a lot more risks with them than the general public realizes," said Modi.

Increase your money and finance knowledge from home

Introduction to Preferred Shares

Learn the difference between preferred and common shares.

View Course »

What Is Your Risk Tolerance?

Answer the question "What type of investor am I?".

View Course »

Add a Comment

*0 / 3000 Character Maximum

37 Comments

Filter by:
mountainez

They should go to jail!

August 01 2013 at 11:04 AM Report abuse rate up rate down Reply
nklswrth

Whats new? Isn't that always how Morgan Stanley, Bear Stearns, BOA, Fannie Mae and thier rotten ilk make thier money? Forget penalties. Shut them down.

August 01 2013 at 8:20 AM Report abuse +1 rate up rate down Reply
SeaHack

That's peanuts!

August 01 2013 at 8:09 AM Report abuse +1 rate up rate down Reply
welcome Richard

The fine is less then the profit. How about some jail time to go along with that paltry fine?

August 01 2013 at 3:04 AM Report abuse +1 rate up rate down Reply
drpmindmender

That $100,000 fine needed 3 more zeros tacked onto the end of it...

...BEFORE the decimal point.

July 31 2013 at 11:06 PM Report abuse +2 rate up rate down Reply
clafoon

The Financial advisors at Morgan Stanley represent Morgan Stanley NOT the Investor. I was an Investor with Morgan Stanley for several years and finally discovered that the Field Vice President was advising me to buy a stock at the same time their internal for profit division was selling the same stock.

As an investor with Morgan Stanley you are also competing with their own internal stock traders.

They did the same thing with Bonds sales. I asked My Field Vice President to buy me a State College bond that I could hole for 3 or 4 years. What he actually did was invest my $40K in the National Bond Market. When I noticed my Bond segment going down I called and asked him what was going on.

When I notified the Morgan Stanley Corporate Headquarters they told me that the market went up and down.

I fired Morgan Stanley and have recovered all my losses by doing my own investing without Morgan Stanley ripping me off with inhouse trades.

July 31 2013 at 10:40 PM Report abuse +3 rate up rate down Reply
mac2jr

Not only did I not get answers to the questions, but someone posted this as an answer "Bigger government is the problem, not the solution".

This person, and those that believe this should be watching C-Span daily to see who are those posting the most Bills in Congress. The Republican Party seems to be the culprit here as they are posting Bills, amending Bills, and passing Bills in record numbers, the problem is that 99.999% of the Bills the Republicans are offering are 'Garbage', designed to discredit the President or the Democrats and virtually none are designed to 'help' the American lower, middle, and in many instances upper classes.

You do NOT tear down your house if you have NO other HOUSE in which to move, but the Republicans do NOT seem to understand this simple Factual principle of life..

July 31 2013 at 9:09 PM Report abuse +4 rate up rate down Reply
chain.link1

No one going to jail? Hmmm....

July 31 2013 at 7:35 PM Report abuse +3 rate up rate down Reply
bobcatlew

Were the financial advisors not properly trained or not properly incentivated to protect their clients interests? Everyone has to pass their licensing exam(s) but there is great pressure to "produce" and that may mean crossing the line from ethical to unethical behavior.

July 31 2013 at 7:27 PM Report abuse +1 rate up rate down Reply
rube810

Learn to invest on your own. It's not difficult.

July 31 2013 at 5:17 PM Report abuse -1 rate up rate down Reply