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William Galvin, secretary of the Commonwealth

(File photo)

SPRINGFIELD -- Morgan Stanley offices in Massachusetts and Rhode Island held in-office sales contests among financial advisors to encourage clients to take out loans against their accounts, according to a complaint filed against the company Monday.

The Massachusetts Office of the Secretary of the Commonwealth Securities Division filed a complaint against Morgan Stanley Smith Barney LLC, accusing the company of being in violation of the Massachusetts Uniform Securities Act.

"Morgan Stanley's firm-wide culture emphasizes the aggressive cross-selling of banking and lending products to wealth management clients," Enforcement Attorney Patrick M. Costello and Associate Director Patrick J. Ahern, both of the Massachusetts Securities Division, wrote in the complaint. "This culture inspired at least two sales contests in Massachusetts, which ran undeterred for sixteen months because of Morgan's Stanley's lack of adequate compliance and supervisory oversight."

Between the start of 2014 and April 2015, 30 financial advisors in Massachusetts and Rhode Island are accused of participating in a contest to convince customers to take out securities-based loans against the value of securities in their portfolios.

The 30 advisors were located at four Massachusetts branch offices and one in Providence: Springfield, Wellesley, Worcester and Waltham.

For convincing 10 customers to take out loans, the financial advisors received $1,000, according to the complaint. For 20 loans, the bonus was $3,000 and financial advisors received $5,000 for 30 loans.

The state securities division estimates the contest generated new loan balances totaling nearly $24,000,000.

"The sales contest resulted in financial advisors acting in their own interest rather than in the best interest of their clients," the complaint states.

Internal emails obtained by the state and shared in the complaint showed financial advisors were excited to participate in the program. One asked if bonuses stop at 30 loans and what bonuses would be available for selling twice the highest bonus level. Another said simply, "Game on."

The initiative was run despite the company's prohibition on such contests.

State officials call the contest a conflict of interest and added clients were unaware why financial advisors were pitching the specific loan type.

Additionally, the complaint states, that financial advisors were monitored and tracked to ensure the securities-based loans were being pitched to clients.

State financial regulators seek a censure condemning the contest, Morgan Stanley to pay an administrative fine and "equitable relief" to clients who took out loans during the contest.

Morgan Stanley spokeswoman Christine Jockle said in a statement that the "complaint is without merit" and that the company will fight the charges.

"The securities-based loan accounts were opened only after discussing the product with each client and obtaining their affirmative consent," Jockle said. "These accounts are valuable to clients, providing access to low-cost liquidity whenever they choose to access it. Importantly, clients pay no fee to open a securities-based account. They are charged only if they choose to borrow money."