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Regulation and Compliance > Federal Regulation > SEC

Morgan Stanley Pays $4M to SEC Over Market Access Violations

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Morgan Stanley agreed Wednesday to pay a $4 million penalty to the Securities and Exchange Commission for allowing a rogue trader to engage in fraudulent trading of Apple stock.

The SEC says that Morgan Stanley & Co. LLC, which offers institutional customers direct market access through an electronic trading desk, failed to have the risk management controls necessary to prevent the rogue trader, David Miller of Rockville Centre, N.Y., from entering orders that exceeded pre-set trading thresholds. 

The trader exploited the market access and, without Morgan Stanley’s knowledge, committed a fraud that eventually shuttered the firm, Rochdale Securities LLC, where he worked. The SEC and criminal authorities have since charged Rockville with fraud, and he has been sentenced to 30 months in prison.

The market access rule requires broker-dealers to have adequate risk controls in place before providing customers with access to the markets. 

Morgan Stanley said in a Thursday statement that it has “updated its written procedures to address the issue identified in the SEC’s Order and is pleased to have this matter behind it.’’

In late November, Los Angeles-based broker-dealer Wedbush Securities and two of its top officials agreed to settle a pending SEC case for market access violations. Wedbush Securities settled by admitting wrongdoing, paying a $2.44 million penalty and retaining an independent consultant.

The Financial Industry Regulatory Authority announced in August that it had filed a complaint against Wedbush Securities for systemic supervisory and anti-money laundering violations in connection with providing direct market access and sponsored access to broker-dealers and nonregistered market participants. That FINRA complaint is pending.

“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,” said Andrew Ceresney, director of the SEC Enforcement Division, in a statement. “Morgan Stanley failed to have reasonable controls in place to mitigate the risks associated with granting market access to a customer.”

In the Morgan Stanley case, the SEC’s order instituting a settled administrative proceeding says that Miller worked at Rochdale Securities LLC and routed to Morgan Stanley’s electronic trading desk a series of orders to purchase Apple stock on Oct. 25, 2012. The orders came steadily throughout the day and eventually tallied approximately $525 million worth of Apple stock, which significantly exceeded Rochdale’s pre-set aggregate daily trading limit of $200 million at Morgan Stanley. In order to execute the orders, Morgan Stanley’s electronic trading desk initially increased Rochdale’s limit to $500 million and later to $750 million without conducting adequate due diligence to ensure the credit increases were warranted, the SEC says.

“Morgan Stanley’s written supervisory procedures did not provide reasonable guidance for electronic trading desk personnel who determine whether or not to increase customer trading thresholds,” the SEC says.

According to the SEC’s order, Miller was using these orders to commit fraud. “He had intentionally enlarged the amount of Apple stock an actual customer wanted to purchase from 1,625 shares to 1,625,000 shares,” the SEC says.

His scheme was to profit personally from the excess shares if Apple’s stock price increased or claim the order size was merely an error if the stock price decreased. “As it turned out, Apple’s stock price began dropping later that day, so the trader falsely claimed that he had made a mistake in placing order. Rochdale was left holding the unauthorized purchase and suffered a $5.3 million loss,” the SEC said. “Rochdale subsequently fell below its net capital requirements to trade securities, and ceased all business operations last year.”

— Check out SEC Fines Wedbush $2.4M in Market Access Case; FINRA Complaint on Deck on ThinkAdvisor.


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