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 Mr. Erzinger in the parking lot of an abandoned Pizza Hut, removing the side mirror and bumper from his car, according to court documents.
Mr. Erzinger told officers he didn’t remember striking anybody. Mr. 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 a light on a persistent problem: the failure of financial firms to properly report infractions to Finra’s central database, a critical tool that large and small investors rely on to vet stockbrokers and other financial professionals.
“It’s really no different than if you’re talking to a doctor,” said Charles Rotblut, a longtime investor and a vice president of the American Association of Individual Investors.
“You have to trust who you’re working with.”
For its part, Morgan Stanley Smith Barney says it followed the correct procedures regarding Mr. 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.”
Mr. Erzinger’s lawyer did not respond to requests for comment.
Finra, the nongovernment regulator that shares oversight of Wall Street with federal agencies like the Securities and Exchange Commission, requires financial firms to disclose employee infractions within 30 days.
Those incidents, ranging from serious criminal offenses to minor customer complaints, are then put into a system known as the Central Registration Depository. Individual investors use the 30-year-old system to check out a stockbroker’s history, including past employment, police records and client lawsuits.
Institutions use the database to investigate job candidates. But Finra depends on Wall Street to update the records — and dozens of new cases show that the information is sometimes missing, out of date or erroneous.
Any deficiencies can deprive individuals and institutions of crucial details they need to properly assess financial professionals before hiring them.
“The goal is for the investing public to know who they’re doing business with,” said Kurt N. Schacht, a managing director for the CFA Institute, an association of investment professionals.
“If infractions aren’t reported and visible, it’s a huge problem.”
This self-reporting system soon faces another test. Policy makers are considering whether to expand the responsibilities of Finra, giving it oversight of tens of thousands of investment advisers, on top of the 600,000-plus brokers already under its purview.
The situation will only put additional pressure on Finra’s system. 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.
Mr. Tourre was the only person named in the S.E.C.’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.
Mr. Tourre was said to be “principally responsible” for marketing the bonds.
Goldman, which neither admitted nor denied wrongdoing, settled the S.E.C.’s claims in July for $550 million — one of the largest fines ever paid by a Wall Street firm.
The charges against Mr. Tourre are still pending. A Goldman spokesman declined to comment. A lawyer for Mr. 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. Finra in 2010 fined Citigroup $150,000 for filing “inaccurate” disclosures about 120 brokers who were fired or resigned after being accused of theft or fraud.
In its disciplinary action, the regulator said Citigroup had “hindered the investing public’s ability to access pertinent background information.”
Finra fined JPMorgan Chase $150,000 for similar violations in 2009.
Alex Samuelson, a spokesman for Citi, said the bank had “a robust internal reporting system and follows all Finra rules on client complaints and brokers’ records.”
A JPMorgan spokesman declined to comment.
Last year the regulator sanctioned Fifth Third Securities, the brokerage arm of the Cincinnati-based Fifth Third Bank, for failing to disclose that seven of its brokers had personal financial blemishes, including bankruptcies and liens.
For example, a financial professional identified only as “MS” told Fifth Third on Nov. 21, 2005, that she had filed for bankruptcy protection. The firm, which declined to comment, did not disclose the filing to Finra until May 11, 2007, more than 500 days late under the rules.
“If they filed for bankruptcy, it does raise a question about their ability to handle money,” said Mr. Rotblut, of the American Association of Individual Investors.
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, Mr. 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 Mr. Greenbaum’s record, as per Finra rules.
About a month later, Mr. Murphy filed an arbitration claim against Citigroup, naming his broker in the complaint, albeit not as a defendant.
In December, a Finra panel awarded Mr. Murphy approximately $1 million. But Mr. 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 Mr. Greenbaum was not a defendant.
The regulations changed in 2009, compelling brokers to reveal arbitration awards in which they were named as a defendant or in the complaint.
The move was aimed at improving transparency, Ms. Condon of Finra said.
As Mr. Greenbaum was grandfathered under the old rules, his current employer, Morgan Stanley Smith Barney — a joint venture between Morgan Stanley and Citigroup’s brokerage arm Smith Barney — did not update the record.
The firm’s spokesman, Mr. Wiggins, called the information in the database “accurate.” “I think these sort of things happens fairly regularly,” said Mr. Greenbaum’s lawyer, Robert Savage, who is also the director of Investor Advocacy Clinic at Florida International University.
“The bottom line for investors is this broker’s record doesn’t reflect the actual outcome of the case.”