On August 5, 2019, FINRA fined Morgan Stanley registered representative Ken Kavanagh $25,000 and suspended him from practicing in the securities industry for eighteen after discovering that he concealed his outside business activity. According to FINRA’s order, beginning in 2003, Kavanagh provided personal management services to professional athletes. In October 2007, he registered his business as CEO-Sports in New Jersey, then formed another LLC in Pennsylvania, MGMT LLC. His services included coordinating travel and dinner arrangements, housing, bill payment, opening and managing bank accounts, and referrals to other professionals for tax return preparations and wills. Kavanagh had approximately 42 clients and generated at least $5 million in fees from 2012 through 2018 for providing these services.
FINRA Rule 3270 (formerly NASD Rule 3030) prohibits FINRA financial advisors from engaging in outside businesses unless they are properly disclosed to and approved by the advisor’s brokerage firm. Mr. Kavanagh did not disclose his interest in MGMT or CEO-Sports to Morgan Stanley. He also attested in annual questionnaires required by Morgan Stanley that he was not involved with any outside business activities. He named a close relative as the sole owner or member of MGMT and CEO-Sports and also as the authorized representative on the each company’s bank accounts. As a result of these FINRA Rule violations, FINRA fined Kavanagh $25,000 and suspended him for eighteen months.
As Stoltmann Law Offices previously alerted investors, Kavanagh has not been registered in the securities industry since resigning from Morgan Stanley in April 2018 after a client complained of his undisclosed outside business activities. On August 15, 2018, a customer also complained that Kavanagh placed unauthorized trades and forged documents.
FINRA Rule 3110 requires Morgan Stanley to have a supervisory system in place to protect clients from brokers engaging in outside business activities. Even if the broker, like Kavanagh fails to disclose the business to his firm, the brokerage firm cannot bury its head in the sand. If there are any red flags that a broker is violating FINRA Rules, then the firm is required to investigate those red flags. Back in March 2004, the SEC warned brokerage firms that they must be “alert to and investigate ‘red flags’ indicating possible undisclosed outside business activities by a representative, whether or not related to the securities business.” The SEC provided examples of red flags, such as living “more lavishly than his business income would allow.” According to FINRA, Kavanagh generated nearly $1 million in income per year from his outside business.
Did you pay Ken Kavanagh, MGMT LLC, or CEO-Sports to provide personal management services? Did you suffer losses in your brokerage accounts managed by Kavanagh at Morgan Stanley? If you worked with Ken Kavanagh and have concerns about the management of your accounts, please contact our office for a free evaluation. We do not get paid until you do!