By Suzanne Barlyn

July 3 (Reuters) - This is the case of a securities broker who spent nine years depositing his client's dividend checks into his personal account before the situation caught up to him. For financial advisers, it's a cautionary tale: If something doesn't smell right, it will eventually draw attention.

Richard Harvey Peress deposited 37 quarterly dividend checks totaling $11,460 into his personal account from 2002 to 2011, beginning when he was a broker for Smith Barney in Scottsdale, Arizona, according to the Financial Industry Regulatory Authority (FINRA).

There was just one problem: Peress didn't own any shares of the company issuing the checks - Public Storage in Glendale, California - and he held the funds even after it was clear to him that he was not entitled to the money, FINRA said.

The industry-funded regulator settled its complaint with Peress on June 25, fining him $5,000 and suspending him for 90 days. Peress, who neither admitted nor denied FINRA's findings, returned the money to his former client last year - after FINRA insisted he do so, the regulator said in the settlement.

Peress' New York-based lawyer, Jeff Kern, said an error by Public Storage in the late 1990s caused the checks to be made out for Peress' benefit. Opportunities for Peress or the firm to detect the problem "were few and far between," he said.

Peress repaid the client last year. A Public Storage spokesman did not reply to requests for comment.

Peress became a Morgan Stanley broker in 2009, when the firm launched a joint venture with Smith Barney. The two firms were fully merged last year. Morgan Stanley software that looks for irregularities flagged the checks, according to a spokeswoman for the firm, and the firm investigated. Peress, confronted by a manager in 2010, said a check was his and may have been old commissions, FINRA said.

In 2011, Peress left Morgan Stanley voluntarily after failing to produce a letter from the former client assuring that he was due the funds. In September 2013, FINRA notified him it was also investigating the deposits. He reimbursed the client two months later, according to the settlement document. Peress now works at a Stifel Nicolaus branch in Scottsdale. A Stifel spokeswoman did not return a call requesting comment.

FINRA has not taken action against Morgan Stanley, the brokerage's firm's spokeswoman said. But it is still possible the firm could be cited for supervision lapses. FINRA declined to comment about that possibility.

The case raises questions about how such a situation could drag on at a major firm for so long.

"There should have been a stink that they could have smelled all the way in New York," said Philip Aidikoff, a lawyer in Beverly Hills, California, who represents investors in securities arbitration cases, though he was not involved in this case. The situation could have been resolved with a phone call to the client, he said.

A Morgan Stanley spokeswoman said in an email that Smith Barney had looked into the matter years earlier. The transfer agent told the firm the checks were for Peress, she said. The transfer agent, Australia-based Computershare Ltd, declined to comment.

FINRA stops short of alleging that Peress stole money. Instead, Peress failed to "adequately respond to red flags that the money was not his," FINRA said in the settlement.

Firms typically use software that spot-checks for questionable deposits, so some deposits can go unnoticed, said Salvatore Faia, president of Vigilant Compliance LLC, a consultancy in Chadds Ford, Pennsylvania.

There were other chances for the firm to catch the error and for Peress to call the former client, FINRA said. In 2007 the payee's name changed from Peress to the former client's retirement account, but the checks continued to be deposited in Peress' account. (Editing by Linda Stern and Douglas Royalty)