MANHATTAN (CN) – A risk officer claims in court that Morgan Stanley fired him for blowing the whistle on an investment adviser who churned accounts “to bilk investors,” making Morgan Stanley tens of thousands of dollars at customers’ expense.
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Clifford Jagodzinski sued Morgan Stanley Smith Barney (MSSB), Morgan Stanley & Co. and Citigroup, in Federal Court. They are the only defendants.
Jagodzinski says he worked for Morgan Stanley as a complex risk officer, identifying and reporting compliance risk issues and securities law violations.
He always received exemplary reviews for his job performance in his 6 years with Morgan Stanley, Jagodzinski claims.
“However, in late 2011, Mr. Jagodzinski discovered that one of MSSB’s newest wealth managers, Harvey Kadden, was flipping preferred securities in a manner that was generating tens of thousands of dollars in commissions but causing losses or minimal gains for his clients and exposing his clients to unnecessary risks,” the complaint states. “These trades were obviously designed to bilk investors.”
Jagodzinski says he suspected Kadden of churning accounts to maximize commissions, in violation of FINRA and SEC rules, and reported the activities to his supervisors, but was told not to investigate them.
“In December 2011, Mr. Jagodzinski reported these trades to his supervisors, David Turetzky and Ben Firestein,” the complaint states. “At first, the supervisors were very pleased with Mr. Jagodzinski’s work. Indeed, Mr. Firestein said, ‘Great job for catching this scam.’ Mr. Turetzky said in sum and substance, ‘I don’t want to be on a beach in Bermuda, fishing with my son, and get a subpoena for what Harvey Kadden is doing – flipping these preferreds.’
“However, upon information and belief, MSSB had given Mr. Kadden a $25,000,000 guarantee. Consequently, MSSB had very significant earnings expectations for Mr. Kadden and did not want to take any steps to jeopardize Mr. Kadden’s book of business.
“Thus, Mr. Jagodzinski was told to stop investigating Mr. Kadden.”
Jagodzinski says he received similar instructions when he reported other violations, including improper treasury trades and drug abuse by one of MSSB’s financial advisers.
“Similarly, in September 2011, Mr. Jagodzinski discovered that another financial advisor, Bill Siegel, was making unauthorized trades on behalf of a client,” the complaint states. “Mr. Jagodzinski reported this violation to Mr. Turetzky in person and via email. When confronted, Mr. Siegel admitted to making 80 unauthorized trades and making other unauthorized trades on behalf of several other clients.”
The complaint adds: “But, again, Mr. Jagodzinski was told not to take any further steps to investigate or report these transgressions. Mr. Turetzky told Mr. Jagodzinski that he did not want to see Mr. Siegel lose his job because he was ‘a stand-up guy.’ Upon information and belief, Mr. Turetzky did not want to fire Mr. Siegel because doing so would have exposed defendants to fines and penalties. To date, upon information and belief, none of the clients on whose accounts Mr. Siegel confessed to making unauthorized trades have received restitution.”
Jagodzinski says his supervisors repeatedly told him not to investigate or report the violations anymore.
He says he was fired 10 days after he told his supervisors Morgan Stanley would violate SEC regulations if it did not stop and report the unauthorized trading.
Jagodzinski claims Morgan Stanley made him sign a confidentiality agreement and non-disparagement clause, and tarnished his professional reputation by falsely claiming that he was fired for unsatisfactory performance.
“Upon information and belief, MSSB instructed Mr. Jagodzinski to keep quiet about these transgressions so that it could (i) limit its exposure to client claims; (ii) not jeopardize its wealth managers’ books of business; and (iii) limit its exposure to legal and regulatory sanctions,” the complaint states.
Jagodzinski seeks reinstatement and more than $1 million in compensatory and punitive damages for whistleblower violations.
He is represented by Rishi Bhandari with Mandel Bhandari.