By Bruce Kelly
Sep. 13, 2012
A former risk officer at Morgan Stanley Smith Barney claims he was fired for blowing the whistle on a variety of infractions by the firm’s registered representatives, including the churning of preferred securities by a star broker the firm recruited last year from rival Bank of America Merrill Lynch.
Clifford Jagodzinski alleged in a complaint filed last month that his firing in April by MSSB was “an action for unlawful retaliation under the Dodd-Frank Act,” as well as claims under state law.
Chief among Jagodzinski’s claims was that late last year, he discovered that one of the firm’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 (them) to unnecessary risks,” according to the complaint, which was filed in U.S. District Court in the Southern District of New York.
“These trades were obviously designed to bilk investors,” according to the complaint.
A superstar producer, Kadden was a 30-year veteran of Merrill Lynch before joining MSSB last October. According to the lawsuit, he got a $25 million guarantee for signing on.
Kadden has been listed regularly on the Barron’s Top 1,000 advisers list.
“Consequently, [MSSB] had very significant earnings expectations for Kadden and did not want to take any steps to jeopardize his book of business,” the complaint alleges. Jagodzinski was thus “told to stop investigating Kadden,” according to the complaint.
MSSB spokeswoman Christine Jockle said: “We believe the complaint is without merit and we intend to vigorously defend ourselves.”
Citigroup Inc., a minority stakeholder in the MSSB joint venture, also was named in the suit. A spokesman did not immediately respond for a request to comment.
The role of whistle-blowers is gaining some attention and notoriety on Wall Street. Sept. 11, the Internal Revenue Service said that the whistle-blower in a tax fraud case against the Swiss bank UBS AG, which involved wealthy Americans hiding assets in offshore accounts, would receive $104 million for revealing secrets about UBS’s dealings with some clients.
The whistle-blower, Bradley Birkenfeld, who spent 30 months in prison for withholding other information, will net about $44 million of the award after taxes and lawyer fees, according to published reports.
The Dodd-Frank Act prohibits retaliation against whistle-blowers, according to the complaint filed by Jagodzinski.
Kadden leads a four-man team which had combined production of more than $14 million in the trailing 12-month period and manages assets in excess of $1 billion.
In December 2011, Jagodzinski’s supervisors, branch manager David Turetsky and complex manager Ben Firestein, gave him a pat on the back for raising the red flag about Kadden, according to the complaint.
“Indeed, Firestein said, ‘Great job for catching this scam,’ while 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,'” according to the complaint.
In a response to the claim, which was filed Sept. 7, MSSB acknowledged that Jagodzinski was asked to investigate certain trades in customer accounts served by Kadden’s team and that he had discussed those trades with his superiors. The firm, however, denied the other allegations.
Jagodzinski had made inquiries into other MSSB, according to the complaint.
After he learned that another broker was making unauthorized trades on behalf of a client, that broker admitted to making 80 such trades, according to the lawsuit.
Turetzky later told Jagodzinski that he didn’t want to see the broker in question lose his job because he was a “stand-up guy” and that firing the broker would have exposed the firm to fines and penalties, according to the lawsuit.
Between December 2011 and April, when he was fired, Jagodzinski reported several violations by brokers to Turetzky. They included improper trades of Treasuries by another MSSB employee, the failure of some of the firm’s brokers to register home offices as alternate work locations and drug abuse by one of the firm’s brokers.
“Finally, during a conversation during the week of April 4, Mr. Jagodzinski told Mr. Turetzky that these violations should be reported” to the Financial Industry Regulatory Authority Inc., according to the complaint. “Mr. Turetzky bristled at this declaration, and less than 10 days later, Mr. Jagodzinski was fired.”
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