Thursday, October 26

Morgan Stanley fined $2.9 Million for Rogue Trading

The 'naked short' issue has been simmering for a long time, so far without getting any real traction. However, there is a steady stream of regulatory fines coming out of the NASD for improper short sale trading. I have covered this in the past, but most of those caught had been smaller traders. Now a big fish has been caught. Take this from the NASD NTM Disciplinary Actions Report for October:

NASD Fines Morgan Stanley Firms $2.9 Million for Widespread Violations of NASD Rules

Number and Scope of Violations Indicate Extensive Reporting Problems at Both Firms NASD imposed fines totaling $2.9 million against Morgan Stanley & Co., Inc. (MSCO) and Morgan Stanley DW Inc. (MSDW) for extensive violations dealing with reporting obligations, best execution, short sales and a range of other NASD, Securities and Exchange Commission (SEC) and Municipal Securities Rulemaking Board (MSRB) rules.

NASD found that MSCO:

  • failed to timely report or incorrectly reported thousands of transactions through the NASDAQ Market Center in NASDAQ National Market securities, OTC Equity securities and listed securities;
  • executed thousands of short sales transactions without ensuring that the firm could deliver or arrange to borrow the securities by the settlement date;
  • failed to execute hundreds of customer trades at the best available price, and will make nearly $5,000 in restitution payments to affected customers;
  • failed to report or incorrectly reported thousands of transactions in corporate bonds; and
  • created locked and crossed market conditions in hundreds of instances.

    NASD found that MSDW:
  • failed to send, or failed to send in a timely manner, required documents to hundreds of customers in connection with municipal bond transactions;
  • failed to report or incorrectly reported thousands of transactions in corporate and municipal bonds; and
  • failed to enforce the firm’s written supervisory procedures with respect to municipal bonds.

    In settling these matters, MSCO and MSDW neither admitted nor denied the charges, but consented to the entry of NASD’s findings. - NASD (PDF. Click for full report)
  • While the full NASD report mentions nothing about 'rogue trading' it was the first thought that popped into my mind reading the report. That these guys were doing whatever with no fear of getting caught. Even though they have been caught (you don't pay a $3 million in fines if your not guilty) I see no mention of this in Google News and only a couple of websites picked up the story at all. This is not the first time they have been fined, and this happens to be one of the smallers fines that they have received lately. Here is a summery of other legal action that Morgan Stanley has been on the receiving end of:

    The NASD fine comes just a few months after the SEC settled charges against the firm for lacking adequate procedures to prevent the misuse of non-public information. Morgan Stanley agreed to a censure and a $10 million fine in June as part of that settlement. In May, the Commission hit the firm with $15 million in civil penalties to settle charges that it destroyed and failed to produce tens of thousands of emails from a previous investigation. - CCH Wall Street

    With all of this money flying out the door in fines, it makes you wonder just how much they are ripping their customers off to still be making a profit?

    Congress Should Investigate Short Selling Records - 9 June 2006
    Are Brokers 'Screwing' Stockholders through Short Selling? - 6 April 2006

    NASD NTM Disciplinary Actions Report for October - NASD (PDF)
    Monthly Disciplinary Actions 2006 - NASD

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