Litigation and probes have become an inseparable part of the U.S. banking industry. With all banking majors on the Securities and Exchange Commission’s (SEC) radar, settlement payments and fines are now an integral component of their cost structure. Morgan Stanley (MS), one of the top Wall Street banks, is the latest to announce disbursement of $4 million as settlement in response to a SEC charge.
Why was the Settlement Needed?
Inadequate risk management measures often lead to troubles for the banks. This happened to Morgan Stanley, when in 2012 it failed to impose proper credit limits for one of its client firm Rochdale Securities LLC. A trader working with Rochdale Securities took advantage of this loophole and carried out a price manipulation scheme through substantial trading of the Apple Inc. (AAPL) stock.
On Oct 25, 2012, the trader in question purchased Apple shares worth $525 million, in spite of a daily trading limit of $200 million. Due to insufficient written guidance provided by Morgan Stanley, the staff directly involved in the transaction was unsuccessful in identifying the unauthorized buy.
This matter eventually led to the closure of Rochdale Securities as well as fraud charges and imprisonment for the guilty trader. On the other hand, the SEC blamed Morgan Stanley for inadequate supervision and risk management controls. Since 2010, the SEC has been taking steps against the trading negligence cases under the market access rule.
Taking cue from the SEC, Morgan Stanley updated its written rules to prevent similar errors in the future. Now, the bank looks to resolve the issue by paying settlement charges.
Our Take
Last month, Morgan Stanley along with JPMorgan Chase & Co. (JPM) and The Goldman Sachs Group, Inc. (GS) came into the spotlight when the Senate’s two-year probe revealed these banks’ aggressive trading in physical commodities and the possibility of price manipulation by them in the commodity market.
It is difficult to ascertain whether the banks, in an attempt to survive and prosper in a highly competitive environment and prevalent unfavorable economic conditions, mistakenly overlook such issues or indulge in them intentionally. Moreover, the SEC’s tough stance in the aftermath of the financial crisis has largely contributed to the investigation and detection of such cases.
Currently, Morgan Stanley holds a Zacks Rank #3 (Hold).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment