Morgan Stanley won a $750,000 clawback from a former advisor who claimed that the firm had failed to notify him of obligations to disclose criminal charges, arbitration records show.
The advisor, Kenneth Scott Walters, joined Morgan from UBS in 2008, according to BrokerCheck records. He parted ways with the wirehouse in 2014, joining Triad Advisors, a hybrid-RIA based in Norcross, Ga.
Morgan filed a claim in April 2014 against Walters for breach of a promissory note, according to FINRA records.
Walters denied that he was liable to repay the note, the records show. He also charged that Morgan failed to advise him of his obligations to disclose criminal events on his CRD Form U4, which allegedly led to a delay in registration with FINRA when [Walters] sought new employment, and which resulted in loss of income and legal expenses, the records show.
Walters was charged with possession of cocaine in 2013, according to his BrokerCheck report and county court records in Georgia. He pleaded guilty and received three years of probation starting in 2014, according to a note in his BrokerCheck report. Walters could not be reached for comment.
'THE BEST DISINFECTANT'
FINRA requires advisors to disclose certain events, like felony charges, liens and guilty pleas in domestic, foreign or military courts. Firms also have policies requiring disclosure of information pertinent to clients and management.
For him to say that Morgan Stanley didnt ask him about it is missing the point, says Tom Lewis, an attorney with Stevens & Lee in Lawrenceville, N.J. The onus is on him to disclose it when he is filling out the registration documents. So its hard to believe that he would try to turn the tables and blame Morgan Stanley.
Disclosure is a key method of protecting clients, as it enables them to make better informed decisions when choosing whether to invest with an advisor, attorneys say.
Sunlight is the best disinfectant in the securities business, says Charles H. Field, an attorney at San Diego-based law firm Sanford Heisler Kimpel. This business is built entirely on trust. Million dollar deals are done on the phone. If you cant trust the other person on the phone or the computer, then the entire system breaks down.
Attorneys note that a nondisclosed event may go unnoticed for a while, but regulators or the firm will eventually notice an advisors undisclosed events, raising uncomfortable questions about why something wasnt previously disclosed.
Oftentimes, there isnt a good excuse, Lewis says.
Walters and Morgan Stanley reached a stipulated agreement last month, which an arbitration panel confirmed. No attorney fees were awarded. A spokeswoman for Morgan declined to comment on the case.
He parted ways with Triad Advisors, an independent firm, in June, according to BrokerCheck. Triad did not return calls seeking comment.