Morgan Stanley (MS) Under Scrutiny

October 5th, 2016 by

Morgan Stanley (MS) may end up in the same boat as its competitor Wells Fargo (WFC) when it comes to using unethical employee incentives to boost the bank’s business.

Regulatory authorities in Massachusetts are charging Morgan Stanley with pushing its salespeople in certain states in New England toward aggressive goals through a contest that offered thousands of dollars in prizes.

Reputation Taking a Hit

gold bull

Source: herval via Flickr

Like Wells Fargo, Morgan Stanley is one of the biggest banks on Wall St. It is known for its iconic bull symbolism, reflecting the notion of a “bull market”—one that is rising considerably, as opposed to a market that is in decline. Unfortunately, the branding of a bear may soon become more appropriate, because the company’s stock price could tumble into a dreaded “bear market” on the news that it is being charged with “dishonest and unethical conduct” by the top securities regulator in Massachusetts.

The related news about Wells Fargo’s ethically dubious cross-selling quotas is still fresh in everyone’s minds after the bank took a thrashing in the news media (and on Capitol Hill) for opening fake bank accounts for up to two million customers without their consent. The tactic was used in order to boost sales quotas that earned employees lucrative bonuses. Before this revelation, Wells Fargo largely enjoyed a stronger reputation for staying above the fray of shady banking practices than many of its peers.

Securities-Based Loans

Morgan Stanley has allegedly been caught up in a somewhat similar scandal to Wells Fargo. Branches of the bank in Rhode Island and Massachusetts apparently pushed financial products known as securities-based loans (SBLs) on its clients by using company-sponsored contests that rewarded employees for selling these types of loans. Peddling 30 of these loans could net someone $5,000, according to William Galvin, the Secretary of the Commonwealth of Massachusetts.

Morgan Stanley Times SquareAccording to Reuters, Galvin told reporters that this “lays bare the culture at Morgan Stanley that bred the high pressure effort to cross-sell banking products to its brokerage customers without regard for the fiduciary duty owed to the investor.”

Whereas Wells Fargo executives largely capitulated about the firm’s misdeeds, Morgan Stanley has vowed to defend itself aggressively. They may not be in a particularly strong position to do so, however: ironically enough, sales contests of this type were expressly prohibited by Morgan Stanley’s own internal rules! It took several months for the bank to realize what was going on, and took even longer for it to bring the contests to a halt.

Given the slow response in corporate oversight, there is a risk in punishing the actual sales personnel who engaged in the contests. In the Wells Fargo case, for instance, some employees who tried to blow the whistle on the fake account scam claim they were wrongfully terminated for doing so, and are now suing the bank.

The one bright side may be the shares of MS recovered swiftly this week after falling almost 4% in the wake of the news. This speaks to a certain level of confidence the markets have in the institution.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.