Morgan Stanley facing a $2M penalty for handling stock transactions of the former First Republic CEO
Morgan Stanley has been fined $2 million by the Massachusetts Securities Division for failing to monitor certain stock sales by a former First Republic CEO, James Herbert II. The lapses in compliance were due to the bank's lack of specific policies to address transactions for insiders at companies regulated by the Federal Deposit Insurance Corporation (FDIC), rather than the Securities and Exchange Commission (SEC).
The trades, worth over $6.8 million, were executed by a California branch serving ultra-high-net-worth clients and were overseen by a managing director who is a registered agent of Morgan Stanley in Massachusetts. The former CEO, identified as "Customer One," sold the stock from February 2022 to March 2023.
The trades were initially flagged by Morgan Stanley's monitoring system for potential insider trading after First Republic's stock price collapsed. However, the firm's compliance officers incorrectly concluded, after only a minute, that there was no relationship between the customer and First Republic, a connection that could have been easily confirmed with a simple internet search.
The former CEO's trades did not require approval from the Executive Financial Services (EFS) team at Morgan Stanley, as First Republic's shares were regulated by the FDIC. The trades were, however, subject to additional review by the EFS team, which specializes in trades by company executives.
The coding that would have routed the trades to the EFS team was removed, bypassing important compliance checks. Additionally, there were instances of off-channel communications by the managing director servicing the CEO's accounts, including a failure to retain text messages.
These lapses in compliance prompted the Massachusetts Securities Division to fine Morgan Stanley $2 million and require the firm to review and improve its policies on identifying and coding senior officers of public companies and to enhance training on record-keeping and insider trading prevention.
In addition to this fine, Morgan Stanley was fined $200 million by the SEC and the Commodity Futures Trading Commission in 2022 over its use of unapproved messaging platforms and its inability to keep track of those communications.
William Galvin, Massachusetts' secretary of the commonwealth, noted that the former executive may have avoided "a near complete loss" due to Morgan Stanley's compliance lapses. Morgan Stanley has offered to settle with the regulator without admitting or denying the findings stated in the consent order.
[1] Source: Massachusetts Securities Division Consent Order, dated May 12, 2023.
- The fintech industry, specifically Morgan Stanley, has been penalized $2 million by the Massachusetts Securities Division for deficiencies in monitoring certain stock transactions, with roots in the absence of specific policies concerning insider trades at FDIC-regulated companies.
- The business of finance, represented by Morgan Stanley, has been subject to scrutiny and punitive measures, as a failure to adhere to standard insider trading prevention protocols allowed a former CEO's trades to bypass essential compliance checks.
- General-news outlets have reported on the crime-and-justice implications of a large fine imposed on Morgan Stanley for lapses in monitoring a former CEO's stock trades, because such lack of due diligence may have prevented a "near complete loss" for the executive.
