Morgan Stanley agreed to pay $4 million to settle U.S. regulatory claims that it lacked adequate risk controls, allowing a rogue employee at a client firm to engage in fraudulent trading.
Morgan Stanley failed to uphold credit limits for a customer firm, Rochdale Securities LLC, where a rogue trader in 2012 engaged in massive trading of Apple Inc. stock, the Securities and Exchange Commission said today in an administrative order.
"Broker-dealers become important gatekeepers when they provide customers direct access to our securities markets, and in this case Morgan Stanley did not live up to that responsibility," Andrew Ceresney, director of the SEC's enforcement division, said in a statement.
The trader bought a total of about $525 million of Apple stock in a single day, on Oct. 25, 2012, far exceeding Rochdale's pre-set $200 million aggregate daily trading limit with Morgan Stanley, the SEC said. The trader, David Miller, pleaded guilty to related criminal charges last year.
The bank's electronic-trading desk increased Rochdale's limit to $500 million, and then to $750 million, without conducting adequate due diligence to make sure the increases were warranted, the SEC said. Morgan Stanley's written procedures didn't give proper guidance to those people who determined whether to raise limits, the agency said.
"Morgan Stanley has updated its written procedures to address the issue identified in the SEC's order, and is pleased to have this matter behind it," said Mark Lake, a spokesman for the New York-based bank.
Miller intentionally enlarged a customer order to 1.625 million shares, rather than 1,625 shares, in a plan to profit personally if the shares rose and claim the order size was an error if the stock price fell, the SEC said. Apple's shares fell later that day, saddling Rochdale with a $5.3 million loss. The firm folded last year.
In October 2013 the SEC took its first action under the market access rule, which was instituted in 2010 to prevent trading missteps.
The agency reached a $12 million settlement with Knight Capital Americas, a predecessor to KCG Holdings Inc., after Knight's mistakes led to it making more than 4 million trades in response to only 212 orders from investors, for a total of 397 million shares changing hands. The errors prompted the losses that brought Knight to its knees and which led to its merger with trading firm Getco to form KCG.
