When FINRA arbitrators get involved, you know it's a messy break-up.
A panel at the industry regulator has ruled against Morgan Stanley and Citigroup Global Markets in a case involving a broker alleged to have siphoned off more than half a million dollars from his wife's account while serving as her financial adviser.
The arbitrators have ordered the firms to pay $625,000 to Laura Lyn Bell, while rejecting Morgan and Citi's request to expunge the matter from the record of the broker, Kirk Bell, who is also an SEC-registered adviser and a CFP.
The couple is seeking a divorce in superior court in Los Angeles.
The case turns on allegations of breach of fiduciary duty, negligence, failure to supervise and breach of contract, which Laura Bell leveled against the two brokerage giants in the FINRA proceeding.
The settlement, which covers the funds that Laura Bell claims were stolen from her and the administrative costs of the case, is barely a drop in the bucket for Morgan and Citi, but it revisits the troublesome issue of the intermingling of advisers' personal and professional conduct.
At a minimum, accounts that a broker manages for a husband or wife warrant a heightened level of scrutiny, according to Bill Singer, a veteran securities attorney who runs the Broke and Broker blog.
"There's a message here to compliance staffs," Singer says. "If you start seeing a lot of outflows and [wire transfers], contact the spouse."
The case dates back to the early 2000s, when Citi controlled Smith Barney, before that unit transitioned to Morgan Stanley in one of the aftershocks of the market meltdown of 2008.
Around August 2001, Laura Bell, then Laura Lipscomb, deposited more than $600,000 into a Smith Barney account. A little more than a year later, in October 2002, Kirk Bell, then an employee of Citigroup Global Markets working out of Glendale, Calif., took over as the broker on Laura Lipscomb's account. The two married later that same month, and Kirk Bell continued as Laura's financial adviser through spring of 2009.
Laura Bell alleged that, from March 2003 to May 2009, Kirk transferred funds from her account to another account for his use, without her knowledge or authorization.
Litigation in the case began with a lawsuit Laura Bell filed in superior court in Los Angeles in July 2012, naming Kirk Bell, Riverflow Wealth Management (the RIA firm he launched in 2009 after leaving Citi) and Morgan Stanley Smith Barney as defendants. In 2015, the case was remanded to FINRA for arbitration, and the plaintiff would eventually add Citigroup Global Markets as a respondent.
A spokesman for Morgan Stanley referred a request for comment to Citi, noting that the conduct in question "took place before Morgan Stanley entered into its joint venture with Smith Barney."
Danielle Romero-Apsilos, a spokeswoman for Citi, says "we are disappointed in the decision and will decline to comment beyond that."
Kirk Bell and attorneys for Laura Bell, Morgan Stanley and Citi did not respond to phone and email messages seeking comment.
Morgan and Citi are both represented by the same attorneys from Keesal, Young & Logan of Long Beach, Calif., in the case. The arbitration panel found the companies jointly and severally liable for the $625,000 in compensatory damages, meaning that either firm could pay Laura Bell the entire amount, or it could be split. Such arrangements are common in cases where a claimant brings action against one firm or business unit that has been subsequently acquired by another, according to Singer.
In this case, even though the conduct in question occurred before Morgan Stanley acquired Smith Barney, as a matter of law, Morgan can still be on the hook because legal liabilities routinely pass from one firm to another through the merger and acquisition process.
"You're allowed to charge the existing firm because when they acquire the predecessor firm," Singer says, "you stand on that predecessor firm arguably from the beginning of time."
A spokeswoman for FINRA says she is unable to comment on the case, given that the details of arbitration proceedings are not public record -- only the disposition.
For outside observers like Singer, that's a major flaw in the system. In this case, for instance, Kirk Bell was not named as a respondent in the FINRA arbitration, and only receives a passing mention in the dispute resolution, which simply notes that the request for expungement is denied without explanation. Anyone interested in the details of the case -- allegations that Kirk Bell secretly arranged for the electronic transfer of his wife's funds into accounts that he controlled to pay down personal debts, that he forged her signature, or that the firms in question "took no action to investigate this obvious conflict of interest" -- would have to go digging into California state court records.
"How about a warning to the industry?" Singer says. "Those lessons are lost."