MORGAN STANLEY SMITH BARNEY LLC SETTLES CFTC CHARGES RELATED TO SEGREGATED AND SECURED FUNDS ALLEGED RULE VIOLATIONS

FROM:  COMMODITY FUTURES TRADING COMMISSION 
CFTC Orders Morgan Stanley Smith Barney LLC to Pay $490,000 to Settle Charges Relating to Rules and Regulations Pertaining to Segregated and Secured Amount Funds

Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing and simultaneous settlement of charges against Morgan Stanley Smith Barney LLC (MSSB), a registered Futures Commission Merchant (FCM), for violating CFTC rules governing secured funds of foreign futures and option customers, commingling customer and firm funds, failing to prepare accurate daily computations of its segregated and secured funds, failing to properly title account statements for four customer segregated accounts, and failing to diligently supervise its employees handling of matters related to its business as a CFTC registrant. None of the violations resulted in any customer losses, according to the CFTC’s Order. The Order requires MSSB to pay a $490,000 civil monetary penalty and to cease and desist from violating the Commodity Exchange Act and CFTC Regulations, as charged.

Specifically, the CFTC’s Order finds that on April 8, 2013, MSSB erroneously transferred approximately $16 million from a customer secured funds bank account resulting in a deficiency in MSSB’s secured funds of approximately $9.27 million. MSSB discovered the error the next day and cured the deficiency, the Order finds. After its secured deficiency in April 2013, MSSB independently engaged KPMG LLP to review its policies and procedures with respect to segregated and secured accounts. KPMG subsequently issued a report recommending changes to MSSB’s policies and procedures, which MSSB has substantially implemented, according to the Order.

The CFTC’s Order also finds that for approximately a six-month period in 2012, MSSB commingled customer segregated and firm funds in a customer segregated bank account.

In addition, for approximately an eight-month period in 2012, MSSB failed to prepare accurate daily computations of its segregated and secured funds, according to the Order. None of the errors caused MSSB to fall below its required segregated or secured funds; however, MSSB was required to refile 120 daily statements as a result of the errors, the Order finds.

Finally, the CFTC’s Order finds that during several months in 2012, account statements for four MSSB segregated accounts were improperly titled as customer secured accounts.

CFTC Division of Enforcement staff responsible for this matter are Allison Passman, David Terrell, Joseph J. Patrick, Ava Gould, Scott R. Williamson, and Rosemary Hollinger. The Division thanks the Commission’s Division of Swaps and Intermediary Oversight and the National Futures Association for their assistance in this matter.

MORGAN STANLEY SMITH BARNEY LLC TO PAY PENALTY FOR FAILURE TO MONITOR EMPLOYEE

FROM: COMMODITY FUTURES TRADING COMMISSION,

CFTC Orders Morgan Stanley Smith Barney LLC to Pay $200,000 for Supervision Violations

Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today issued an order filing and settling charges that Morgan Stanley Smith Barney LLC (the respondent), a futures commission merchant (FCM) based in Purchase, N.Y., violated CFTC regulation 166.3 by failing to diligently supervise its employees’ handing of customer accounts.

The CFTC order requires Morgan Stanley Smith Barney to pay a $200,000 civil monetary penalty and prohibits it from violating CFTC regulation 166.3, as charged.

According to the order, the respondent’s "Customer A" provided trust services for its clients. In the course of providing such services to one of its clients, the order finds that Customer A accepted orders to trade commodity futures contracts on behalf of its own third party client, accepted the third party client’s money to place those trades, and affected the trades via a contract market on the third party client’s behalf. These contracts were traded in a proprietary futures account in Customer A’s name carried initially at Citigroup Global Markets Inc. (CGMI), a registered FCM, and later in an account carried by the respondent, the order finds. Through these actions, Customer A acted as an FCM, without being registered as such, in violation of the Commodity Exchange Act (CEA), according to the order.

According to the order, from 2006 to 2008, Customer A conducted five transfers of funds from its proprietary commodity futures trading account to a third party client’s bank account. The fact that funds were moving from a proprietary trading account to a third party bank account should have led the respondent’s employees executing the transactions to question Customer A’s actions and to investigate to determine whether the account was being carried properly, the order finds.

However, the respondent’s employees failed to diligently investigate the suspicious transactions, according to the order.

No later than January 15, 2010, the respondent realized that Customer A’s proprietary futures trading account had been carried improperly since 2006, the order finds. Nonetheless, the respondent continued to allow trading on behalf of the third party client to take place in Customer A’s account in January 2010, March 2010, and May 2010, according to the order. The order finds that the third party client’s funds were ultimately moved from Customer A’s proprietary account to an account in the third party client’s name on or about May 27, 2010.

At the time of the above-described events, the respondent maintained an inadequate system of supervision and internal controls to detect and deter violations of the CEA and CFTC regulations, the order finds. Consequently, the respondent failed to diligently supervise the handling by its partners, officers, employees and agents relating to its business as a CFTC registrant, in violation of regulation 166.3, the order finds.

CFTC Division of Enforcement staff responsible for this case are Jason Mahoney, Timothy J. Mulreany, George Malas, Paul Hayeck, and Joan Manley.