SEC, FINRA Enforcement: Morgan Stanley Fined on Muni Bond Shorts

Cash and other incentives were subsequently paid to health care professionals in China hospitals to recommend Mead Johnson Nutrition products and provide the company with contact information for patients who were new or expectant mothers so it could market its infant formula to them directly. The company did not accurately reflect in its books and records the more than $2 million in improper payments made during a five-year period.

The company consented to the order without admitting or denying the findings and agreed to pay $7.77 million in disgorgement, $1.26 million in prejudgment interest and a $3 million penalty.

FINRA Censures, Fines Stock USA Execution Services on AML Failures

FINRA censured Stock USA Execution Services Inc. in two separate instances, assessing a fine of $200,000 in the first and $85,000 in the second after it found supervision, surveillance, and recordkeeping violations and deficiencies related to anti-money laundering (AML) requirements in the first case and failure to preserve certain order memoranda, account statements, customer confirmations, and/or other books and records in the second.

According to the agency, in the first case, the firm failed to establish adequate AML policies and procedures to detect, investigate and report possible suspicious activity while it was engaged in an extensive direct market access (DMA) online-brokerage business.

Even though FINRA queried it numerous times over thousands of instances of potential manipulative trading activity in certain customer accounts, the firm took no meaningful steps to find possible manipulative activity by its DMA customers. Instead, it continued to rely on its manual-based real-time monitoring of order/trade activity.

But the high-volume electronic trading environment of its DMA business meant none of those measures were effective, and they were not meant to be used in such an environment. The firm’s customers included domestic and foreign individuals and entities, including foreign financial institutions (FFIs). Customers could directly enter, modify and cancel orders, route orders to a specific market center and monitor order status in real time.

The firm permitted its FFI customers to extend their trading access to their own clients, and even facilitated this by allowing FFI customers to maintain master/subaccount and omnibus account structures at the firm, despite the regulatory risks that presented. It never conducted periodic reviews or look for suspicious activity in FFI accounts, nor did it implement procedures to restrict access to market-access systems to specifically authorized persons. Post-trade execution reports were inadequate to detect manipulative trading activity and the firm failed to record all orders entered through the third-party trading platform, instead relying on the platform owner to do so.

In the second case, the firm failed to preserve some order activity file records on open orders generated by specified order management systems for three of its four order management systems. It also failed to show the correct entry time and/or execution time on memoranda of brokerage orders; failed to denote on order memoranda that the order was a directed order; failed to denote the correct order entry times, cancellation times and/or routing venues on order memoranda; and failed to show accurate time notations on order memoranda. In addition, it failed to designate whether orders were short or long sales or short exempt, incorrectly marked long sales as a short sales, and incorrectly marked short sales as long sales.

Order audit trail system (OATS) reports were inaccurate, incomplete or improperly formatted; reportable order events (ROEs) were not transmitted; orders were accepted from customers and executed in whole or in part in the premarket or postmarket session without customers being notified that extended hours trading involves material trading risks; and other failures also occurred.

The firm neither admitted nor denied the findings, but consented to the sanctions in both instances.

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