Driving his black Mercedes-Benz over the Fourth of July weekend, a Morgan Stanley Smith Barney broker, Martin Joel Erzinger, hit a cyclist, leaving the rider seriously injured on the side of the road. Not long after, police found Erzinger in the parking lot of a Pizza Hut, removing the side mirror and bumper from his car, according to court documents. Erzinger told officers he didn't remember striking anybody.
Erzinger was charged with a felony over the summer and pleaded guilty to two lesser misdemeanor charges in December. Morgan Stanley Smith Barney, which was supposed to tell regulators within 30 days of the initial charges, took months to report the incident.
Now the Financial Industry Regulatory Authority, Wall Street's self-policing organization, is looking at whether the brokerage firm violated securities laws by not disclosing the charges in a timely fashion.
"FINRA is investigating the matter," said Nancy Condon, a spokeswoman for the regulator. "There are serious questions about whether the reporting obligations were met."
The case casts light on the failure of financial firms to properly report infractions to FINRA's central database, a tool that large and small investors use to vet financial professionals.
"It's really no different than if you're talking to a doctor," said Charles Rotblut, a vice president of the American Association of Individual Investors. "You have to trust who you're working with."
Morgan Stanley Smith Barney says it followed the correct procedures regarding Erzinger, disclosing the matter once the related court documents became available. The reporting requirement, said Jim Wiggins, a spokesman for the firm, was met in "an accurate and timely manner."
Erzinger's lawyer did not respond to requests for comment.
This self-reporting system faces another test. Policymakers are considering whether to give FINRA oversight of tens of thousands of investment advisers, on top of the 600,000-plus brokers already under its purview.
Wall Street, which finances FINRA's operations, has a checkered history of reporting infractions by brokers. When regulators last cracked down on such filing violations in 2004, the sweep ensnared nearly 30 securities firms, including some of the biggest names on Wall Street. At the time, the National Association of Securities Dealers, FINRA's predecessor, fined brokerage firms a collective $9.2 million for failing to properly disclose customer complaints and criminal convictions.
The same year, Morgan Stanley separately was hit with a $2.2 million penalty for failing to appropriately report 1,800 incidents of customer complaints and other wrongdoing. It was the largest fine ever levied against a firm for disclosure issues.
Since then, the tally of FINRA's disciplinary cases has ebbed and flowed. In 2010, the regulator suspended 56 brokers for failing to report previous infractions, up from 34 in 2006. Annual fines rose to $2 million from $1.6 million over the same period.
In one of the most prominent cases last year, FINRA fined Goldman Sachs $650,000 for failing to disclose that a trader, Fabrice P. Tourre, and another employee had received a Wells notice from the Securities and Exchange Commission, a warning that the agency was considering an enforcement action against them.
Tourre was the only person named in the SEC's fraud case against Goldman Sachs last year. The agency accused the investment bank of misleading investors about a complex security tied to subprime mortgages. Tourre was said to be "principally responsible" for marketing the bonds.
Goldman, which neither admitted nor denied wrongdoing, settled the SEC's claims in July for $550 million — one of the largest fines ever paid by a Wall Street firm. The charges against Tourre are still pending.
A Goldman spokesman declined to comment. A lawyer for Tourre did not respond to requests for comment.
While most disclosure cases don't grab headlines, they all go straight to the issue of trust.
Even when firms follow the letter of the law, they can violate the spirit, preventing investors from getting the full story.
Consider the record of a Citigroup broker, Richard Greenbaum. In 2008, an investor, James Murphy, complained in a letter to Citigroup that his stockbroker, Greenbaum, had put him in unsuitable investments, causing his portfolio to lose value. The firm, which determined the matter was without merit, noted the complaint in Greenbaum's record, as per FINRA rules.
About a month later, Murphy filed an arbitration claim against Citigroup, naming his broker in the complaint, albeit not as a defendant. In December, a FINRA panel awarded Murphy approximately $1 million. But Greenbaum's record reflects only the original complaint and not the later arbitration award.
Technically, it does not have to be included. FINRA rules at the time of the original claim did not require the disclosure since Greenbaum was not a defendant.
As Greenbaum was grandfathered under the old rules, his current employer, Morgan Stanley Smith Barney, did not update the record. The firm's spokesman, Wiggins, called the information in the database "accurate."