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.