Morgan Stanley Investment Management has agreed to pay $8.8 million to settle charges that one of its portfolio managers unlawfully conducted prearranged trading known as “parking” that favored certain advisory client accounts over others, the Securities and Exchange Commission announced on Wednesday.
“Instead of playing by the rules, Huang engaged in prearranged trading schemes that benefited some clients while harming others,” said Marshall S. Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit, in a statement. “Morgan Stanley failed to uncover Huang’s misconduct due to its lack of supervisory oversight and failure to implement policies specifically addressing prearranged trades.”
An SEC investigation found that while managing accounts that needed to liquidate certain positions, Sheila Huang arranged sales of mortgage-backed securities to SG Americas trader Yimin Ge at predetermined prices that would enable her to buy back the positions at a small markup into other accounts advised by Morgan Stanley.
Both Huang and Ge agreed to be barred from the securities industry and pay penalties in the settlement, and SG Americas agreed to pay more than $1 million to settle the SEC’s charges.
The SEC also found that Huang sold additional bonds at above-market prices to avoid incurring losses in certain accounts, but she repurchased them at unfavorable prices in a fund that she managed without disclosing it to the disadvantaged fund client.
Huang, who no longer works at Morgan Stanley, conducted the schemes in 2011 and 2012, according to the SEC.
According to the SEC’s orders instituting settled administrative proceedings, Huang prearranged transactions for five sets of bond trades. She sold them to Ge at the highest current independent bid price available for the securities, and executed the repurchase side of the cross trade at a small markup over the sales price, according to the SEC.
“By not crossing these positions at the midpoint between best bid and offer, Huang generally allocated the full benefit of the market savings to its purchasing clients, even though the buying and selling clients were owed the same fiduciary duty,” the SEC’s orders state.
Huang also evaded internal cross trade requirements and caused violations of regulatory prohibitions on cross trades by using a broker to effectuate the trades, the SEC says.
According to the SEC, Huang sold certain bonds at above-market prices to SG Americas and simultaneously sold two bonds from an unregistered MSIM fund to SG Americas at below-market prices for “no legitimate business purpose.” The SEC says the trades offset the above-market prices of the other bonds Huang sold.
At the time of the sale to SG Americas, Huang prearranged their repurchase by an unregistered fund she managed and advised at Morgan Stanley.
“Through these trades, Huang moved approximately $600,000 in previously unrealized losses from the selling accounts to the unregistered Morgan Stanley fund,” the SEC says.
Without admitting or denying the findings, Huang agreed to pay a $125,000 penalty and is barred from the securities industry for at least five years, and Morgan Stanley agreed to pay an $8 million penalty and reimburse a total of $857,534 to certain client accounts that were harmed by Huang’s misconduct.
A Morgan Stanley spokesperson said in a statement, “While we regret the actions of the former employee, we are pleased to have resolved this matter. We cooperated with the SEC throughout their investigation and took appropriate compensatory action with respect to clients harmed by the misconduct. The actions of this former employee stand in stark contrast to our firm’s commitment to integrity and the highest standards of ethical conduct.”
A separate SEC order found that SG Americas failed to make and keep accurate books and records and failed to supervise Ge, who “willfully aided and abetted Huang’s violations,” the SEC says.
Without admitting or denying the findings, SG Americas agreed to pay an $800,000 penalty and $211,093 in disgorgement and prejudgment interest, and Ge – who no longer works at the firm – agreed to pay a $25,000 penalty and is barred from the securities industry for at least three years.
In a statement, the firm said, “SG Americas Securities LLC cooperated fully with the SEC and is pleased to have resolved this matter.”
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