FINRA Fines and Suspends Former Farmington Hills Morgan Stanley Broker for Junk-Bond Abuses

Stoltmann Law Offices, a Chicago-based investor rights law firm, represents investors across the country in suits against brokerage firms, investment advisors, investment banks, and insurance companies. Typically, we offer our services on a contingency-fee basis which means we do not get paid until you do.  We understand most of our prospective clients come to us having already been financially burned and rarely have the wherewithal to pay out of pocket for legal services.

Our attorneys are currently investigating claims by investors against Morgan Stanley involving fired Morgan Stanley broker Robert David, Jr., of Farmington Hills, Michigan. According to a regulatory filing, Robert David Jr. played fast and loose with client information on Morgan Stanley documents used by compliance to approve investments by clients in high risk junk bonds.  The information David manufactured included client net-worth, liquid net-worth, and changing the risk tolerance on client documents. Morgan Stanley has limitations in place for soliciting investments in high risk junk bonds to protect against over-concentration risk. David altered these documents to avoid these compliance protocols and restrictions. It was also alleged by FINRA that David made 538 unauthorized trades in eight client accounts.

Investing in junk-bonds can be a high risk investment plan. These sorts of corporate bonds offer considerably higher coupon payments, usually 7% per year or higher, but carry with them a substantially higher risk of default. If a company goes out of business, runs into cash shortfalls, and then seeks some sort of restructuring, like through a Chapter 11 Bankruptcy filing, the bond holders can be wiped out completely. Most public companies that issue bonds to investors publicly are rated by the three primary ratings agencies – Standard & Poor’s, Moody’s, and Fitch.  Although each is slightly unique, generally, all three rate bonds using a AAA to D structure. AAA is reserved for the absolute highest credit reliability, like that of United Kingdom. According to published reports, only two United States companies have earned a AAA rating, Microsoft and Johnson & Johnson. In order for a bond to be rated junk, its ratings typically need to fall below BBB- on the Standard and Poor’s scale, and are considered to be “high risk” by definition. Investing in junk bonds may be suitable for investors seeking high income so long as they are comfortable with the high risk inherent in such a strategy. In a rising interest rate environment, this strategy could spell doom for investors.

A financial advisor who concentrates your accounts in junk bonds is doing you a disservice and is exposing you to exponentially more risk than a well diversified account.  Even in a well-managed, diversified account, junk bonds may have a place. But to concentrate more than 20% of an account in junk bonds, and in some instances upwards of 70% or more, is simply not suitable for almost any investors, at least when it comes to solicited investment advice.  This is the precise reason Morgan Stanley has concentration limits on junk bonds and why David sought to avoid those restrictions.

Typically, brokers like to sell junk bonds because they pay a premium. Not called “commissions”, brokers are paid a “mark-up” when they sell a bond to a client, and a “mark-down” when a bond is bought from a client, or sold.  For junk bonds, brokers can be paid mark-ups as high as 5%, which encourages liquidity in these high risk investments.  If your financial advisor solicited you to invest in junk bonds, you may have a claim to pursue through FINRA Arbitration.  Please contact Stoltmann Law Offices for a no-obligation consultation with a securities attorney, at 312-332-4200.