Among recent enforcement actions, the Financial Industry Regulatory Authority censured and fined Morgan Stanley & Co. and Morgan Stanley Smith Barney LLC on supervisory failures regarding tax-exempt municipal bonds, and Stock USA Execution Services, Inc. on two separate issues.
In addition, the Securities and Exchange Commission announced a $12 million settlement with Mead Johnson Nutrition, maker of the infant formula Enfamil, for bribing Chinese hospital workers.
FINRA Censures, Fines Morgan Stanley on Muni Bond Shorts
FINRA censured Morgan Stanley & Co. LLC and Morgan Stanley Smith Barney LLC (dba Morgan Stanley). Morgan Stanley was fined $675,000, of which $124,406.93 was imposed jointly and severally with Morgan Stanley & Co. LLC.
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According to the agency, the firms’ supervisory procedures didn’t account for short positions in tax-exempt municipal bonds that resulted primarily from trading errors at the firms’ retail branches. Those failures resulted in the firms inaccurately representing to at least 1,500 customers that at least $880,000 in interest that the firms paid to those customers was exempt from taxation.
The firms, however, did not hold the bonds on behalf of the customers; the interest paid to those customers came from the firms, and was therefore taxable as ordinary income. That caused an underpayment of at least $358,000 in federal income taxes.
At one point, the firms recognized that short positions were not being covered in a timely fashion. But they did not provide adequate guidance or oversight on how and when the municipal short positions should be covered. The problem was magnified thanks to the difficulty of covering these positions because of the market structure and illiquidity of municipal bonds. As a result, municipal short positions were not covered for a month or more, and some were not covered for years.
FINRA also found that the customers’ account statements inaccurately said that they were receiving tax-exempt income.
The firms neither admitted nor denied the findings, but consented to the sanctions.
SEC Fines Infant Formula Maker for Bribing Chinese Hospitals
The SEC has announced that Meade Johnson Nutrition Co., the maker of Enfamil, has agreed to settle charges that it violated the Foreign Corrupt Practices Act (FCPA).
According to the agency, the firm’s Chinese subsidiary made improper payments to health care professionals at government-owned hospitals to recommend the company’s infant formula to patients who were new or expectant mothers.
Employees funded the improper payments through “distributor allowance” funds paid to third-party distributors who market, sell, and distribute the company’s products in China. Although the funds contractually belonged to the distributors, employees exercised some control over how the money was spent and provided specific guidance to distributors on how to use the funds.