Morgan Stanley’s MS unit – Morgan Stanley Investment Management – will have to shell out $8.8 million in settlement due to the failure to discover one of its portfolio managers’ misconduct owing to its lack of supervisory oversight and failure to implement policies, specifically addressing prearranged trades, according to the Securities and Exchange Commission (“SEC”).
The former Morgan Stanley portfolio manager, Sheila Huang, along with the assistance of Societe Generale SA brokerage unit trader, Yimin Ge, indulged in prearranged trades to favor certain advisory client accounts over others.
Pre-arranged trading or "parking" is a deceitful practice due to which certain investors get advantage over others including better pricing and the removal of risk.
The Back Story
An investigation by the SEC revealed the fraudulent schemes conducted by Huang in 2011 and 2012. Huang arranged sales of mortgage-backed securities to Societe Generale brokerage unit, SG Americas trader Ge, with a plan to buy back the positions at a small markup into other accounts advised by Morgan Stanley. This was carried out while managing accounts that needed to liquidate certain positions.
Moreover, 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.
“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.
The Penalties
As a result, both traders agreed to be barred from the securities industry and pay penalties in the settlement. Though both traders did not admit or deny the findings, Huang agreed to pay a $125,000 penalty and is barred from the securities industry for at least five years, while Ge agreed to pay a $25,000 penalty and is barred from the securities industry for at least three years.
Without admitting or denying the findings, 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, while SG Americas agreed to pay an $800,000 penalty and $211,093 in disgorgement and prejudgment interest.
Our Take
While the SEC has increased its focus on the opaque bond trading, several instances of extensive bond parking have been unearthed with debts sold with an agreement to buy them later at a higher price. The current settlement will compel the companies to strengthen their policies to identify prearranged trades and discourage them.
"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," a Morgan Stanley spokesman said in a statement to Reuters.
Currently, Morgan Stanley holds a Zacks Rank #4 (Sell). Some better-ranked investment brokerage firms include Arlington Asset Investment Corp. AI, E*TRADE Financial Corporation ETFC and Evercore Partners Inc. EVR. All these stocks sport a Zacks Rank #2 (Buy).
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