Victim of Financial Fraud? Call Now

Morgan Stanley Brokers Allegedly Executed Unsuitable Options Trades Resulting in Investor Losses

Sep 7, 2022 Articles

Did you lose money because of options trading in your Morgan Stanley account? Unfortunately, according to a series of recent allegations, you are not alone. In addition to recent complaints against Morgan Stanley brokers, investors should note that Morgan Stanley has an especially high number of regulatory actions on its firm record. 

What is Options Trading? 

Options trading is complex and does not suit most investors’ needs. When an investor buys an option, he is purchasing the right to buy or sell a share at a certain price within a certain timeframe. An options trading strategy attempts to generate a profit by betting that the price of a share will change by a specified date. 

  •   Call options generate a return if the price of a share increases. With a call option, the investor is hoping to purchase shares at a lower price, once the price of those shares has gone up by a specified amount. 
  •   Put options make money if the price of the share decreases. If an investor buys a put option, he is planning to sell their shares back to the option seller for more than the market price. The seller will have to make up the difference. 

Deadlines: Both call and put options have deadlines, and the share price must change by a specified date.

Strike Price: Both types of options contracts have a “strike price.” The strike price is the price that the option must rise above or dip below.

Because multiple factors must fall into place for options to generate a return for investors, investors are likely to lose money. 

FINRA knows that options trading is confusing to new investors and has published a guide with a glossary of terms to help with the basics. However, by no means does familiarity with the jargon fully prepare an investor for the risks associated with options trading. Option investors must always be prepared to lose their entire premium. 

Did Morgan Stanley Brokers Recommend Unsuitable Options Trading Strategies?

At least six brokers at Morgan Stanley have faced investor disputes alleging that they recommended unsuitable options trading strategies. 

  1. According to a dispute filed on January 20, 2022, an investor alleged that Morgan Stanley broker Christopher McCaffrey recommended an unsuitable options trading strategy that resulted in losses and a request for damages of over $15 million.
  2. On November 1, 2021, three Morgan Stanley brokers – Elizabeth Layne, Michael Wagner, and Michael Spector – faced investor allegations that their recommendations of an unsuitable options investment strategy led to losses and a request for damages of over $15 million.
  3. Anthony Gallea has three recent (2018-2022) investor disputes on his record alleging his options trading strategy was unsuitable and requesting damages in unspecified amounts.
  4. One dispute on Craig Thistlethwaite’s record alleges that he breached his fiduciary duty regarding stock options from 2010 to 2015. Another dispute, dated February 5, 2022, alleges an unsuitable stock options strategy that lasted from May 2015 to May 2021.

These BrokerCheck records were accessed on August 24, 2022.

What Makes an Investment Unsuitable? 

FINRA Rule 2111 requires brokers to exclusively recommend investments that suit their investors’ needs. If an investor specified that they wanted low-risk investments or reliable income, options would be unsuitable. 

Regulatory Action for Morgan Stanley Options Trading

FINRA fined Morgan Stanley $875,000 following allegations that the firm misrepresented 156,678 options transactions. You can read their complete record of regulatory actions here

Morgan Stanley’s Alleged Failure to Supervise 

In addition to Morgan Stanley’s two recent regulatory actions indicating its failure to adequately supervise its brokers’ trading activities, there are numerous more regulatory actions on the firm’s record.

  1. 529 Savings Plan 

In 2020, FINRA alleged that Morgan Stanley failed to supervise representatives’ recommendations to customers to purchase particular share classes of 529 savings plans. According to these allegations, over $180 million of 529 share purchases were not subjected to the firm’s share-class suitability guidelines. Of course, savings plans should be carefully monitored to ensure they only invest in low-risk investments. 

  1. Excessive Trading of Corporate Bonds 

Another FINRA regulatory action from 2020 alleges that Morgan Stanley failed to reasonably supervise a registered representative who recommended short-term trades of corporate bonds. This trading activity allegedly generated nearly 100 alerts showing that the trades needed a supervisory review, but Morgan Stanley failed to take reasonable steps to conduct such a review – even after the firm discovered that the excessive fees associated with the representative’s short-term trading were costing his clients more money than the account was generating. This trading activity allegedly led to losses of more than $900,000. 

  1. Wrap Fees 

FINRA alleges that Morgan Stanley used misleading marketing and client communications related to its wrap fee programs – wrap fees go toward third-party advisers. More simply put, Morgan Stanley told investors that their brokers would directly execute most client trades, but in actuality, wrap managers directed most if not all trades, incurring transaction-based charges for certain accounts. These fees were allegedly not visible to the investor, making it impossible for investors to evaluate what their wrap fee accounts cost. 

As a result, FINRA fined Morgan Stanley $5 million. 

Should I Be Concerned About My Morgan Stanley Investments? 

Morgan Stanley is a well-known name in the financial industry, but name recognition does not equate to a spotless record. Clearly, far from it.

If you suspect you suffered losses in your Morgan Stanley account due to unsuitable options trading or any other type of broker misconduct, get in touch with one of our securities lawyers today: (877) 600-0098 or info@kurtalawfirm.com