Ex-MSSB exec: I was fired for whistle-blowing

A former risk officer at Morgan Stanley Smith Barney LLC claims that he was fired for blowing the…

A former risk officer at Morgan Stanley Smith Barney LLC claims that 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 against state law.

Chief among his 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 for the Southern District of New York.

“BILK INVESTORS’

“These trades were obviously designed to bilk investors,” according to the complaint.

A superstar producer, Mr. 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.

Mr. Kadden has been listed regularly on the Barron's Top 1,000 advisers list.

“Consequently, [MSSB] had very significant earnings expectations for Mr. Kadden and did not want to take any steps to jeopardize his book of business,” the complaint alleges.

Mr. Jagodzinski was thus “told to stop investigating Mr. 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.

Spokeswoman Natalie Marin declined to comment.

The role of whistle-blowers is gaining some attention and notoriety on Wall Street.

Last Tuesday, the Internal Revenue Service said that the whistle-blower in a tax fraud case against the Swiss bank UBS AG involving wealthy Americans hiding assets in offshore accounts, will receive $104 million for revealing secrets about UBS' dealings with some of those 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.

Mr. Jagodzinski's suit cites the Dodd-Frank Act, which prohibits retaliation against whistle-blowers.

Mr. Kadden leads a four-man team that had combined production of more than $14 million in the trailing-12-month period and manages assets in excess of $1 billion.

Last December, Mr. Jagodzinski's supervisors, complex manager Ben Firestein and branch manager David Turetzky, gave him a pat on the back for raising the red flag about Mr. Kadden, according to the complaint.

INVESTIGATING TRADES

“Indeed, Mr. 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 filed Sept. 7, MSSB acknowledged that Mr. Jagodzinski was asked to investigate certain trades in customer accounts served by Mr. Kadden's team and that he had discussed those trades with his superiors.

The firm, however, denied the other allegations.

Mr. Jagodzinski had made inquiries into other MSSB brokers, according to the complaint.

One broker admitted to making 80 unauthorized trades on behalf of a client, according to the lawsuit.

Mr. Turetzky later told Mr. 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 MSSB to fines and penalties, according to the lawsuit.

Between December and April, when he was fired, Mr. Jagodzinski reported several violations to Mr. Turetzky, according to the suit.

They included improper trades of Treasuries by another MSSB em-ployee, 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,” according to the complaint.

Mr. Turetzky did not return a phone call and Mr. Firestein referred a reporter to MSSB.

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