SEC Alleges Morgan Stanley Advisers Committed Securities Fraud

The Securities and Exchange Commission (“SEC”) filed a Complaint in the United States District Court for the District of Massachusetts, charging James S. Polese (CRD #:2636427) and Cornelius Peterson (CRD #: 5769919), both prior investment advisers of Morgan Stanley in Boston, Massachusetts, with defrauding several customers and stealing their assets. The Securities and Exchange Commission vs. James S. Polese and Cornelius Peterson [Case 1:18-cv-10186, Filed January 31, 2018]. The United States Attorney’s Office also filed a parallel action, in which Peterson and Polese were charged with investment adviser fraud, bank fraud, conspiracy and identify theft.

The SEC’s Complaint alleged that between August 2014 and May 2017, Peterson and Polese participated in a fraudulent scheme, part of which involved an elderly client’s $450,000.00 in assets being stolen. Peterson and Polese allegedly misappropriated $350,000.00, where $100,000.00 had been used by them to invest in their personal accounts, with the remainder directed to a bank account controlled by Polese.

The Complaint also stated that between March 2017 and May 2017, a number of unapproved withdrawals totaling $93,000.00 had been executed by Polese from the elderly client’s account to pay Polese’s childrens’ college tuition and Polese’s credit cards.

The Complaint additionally alleged that Peterson and Polese breached fiduciary duties to their customers. Particularly, unbeknownst to customers, Peterson and Polese invested the funds of their customers in investments that Peterson and Polese maintained a financial stake. Peterson and Polese also mysteriously used the assets belonging to a customer to secure a loan for purposes of financing an entity that Peterson and Polese invested in. Further, two customers had been defrauded by Polese when he procured a loan from a customer under terms that were not beneficial to the customer, and charged another customer fees that were 50% greater than what the customer and Polese had previously agreed upon.

The SEC alleged that Peterson and Polese violated Section 10(b) of the Exchange Act; Rule 10b-5; Section 206 of the Advisers Act; and aided and abetted Section 204 of the Advisers Act. SEC sought civil penalties, permanent injunctions and disgorgement of Polese’s and Peterson’s ill-gotten gains.

While Polese’s fate is yet to be determined, on January 31, 2018, Peterson pled guilty to investment adviser fraud, conspiracy, and bank fraud. United States v. Cornelius Peterson, Crim. Information No. 1:18-cr-10027. Subsequently, on July 17, 2018, Peterson consented to the SEC’s Order Instituting Administrative Proceeding Pursuant to Section 15(b) of the Exchange Act and Section 203(f) of the Advisers Act, Making Findings, and Imposing Remedial Sanctions, under which SEC barred Peterson from acting as a broker or investment adviser or associating with firms that sell securities or provide the public with investment advice.

Polese and Peterson have disclosed on FINRA BrokerCheck that customers have filed disputes alleging Polese’s and Peterson’s sales practices violations. On My 26, 2017, two Morgan Stanley Smith Barney customers filed complaints alleging Polese misrepresented fees charged in their managed accounts between January 2015 and May 2017. One of those complaints was settled for $33,260.00 in damage; the other is pending.

On November 7, 2017, a customer filed arbitration #17-02954, alleging that Peterson and Polese misappropriated the customer’s assets. The arbitration is still ongoing. And on May 21, 2018, a Morgan Stanley customer demanded $136,500.00 in damages as a result of Polese’s alleged unauthorized stock trading.

Prior to the SEC’s Complaint, Morgan Stanley discharged Peterson and Polese on June 26, 2017, citing allegations of misappropriation of customer assets. In addition, on September 1, 2017, Financial Industry Regulatory Authority (“FINRA”) barred Peterson and Polese in all capacities for failing to respond to FINRA’s request for their information.

If you believe that you are a victim of investment-related misconduct committed by Cornelius Peterson or James S. Polese, contact the Law Office of Peter M. Spett at (561) 463-2799 for a complimentary consultation to evaluate your legal rights and claims. Peter M. Spett has extensive experience recovering losses for investors.