Morgan Stanley Investment Management has agreed to pay $8.8 million to resolve an investigation into mortgage backed securities that its portfolio manager parked at a broker before buying back the securities into other customer accounts on favorable terms. The brokerage firm, SG Americas, has agreed to pay more than $1 million in the settlement.
The Morgan Stanley portfolio manager engaged in unlawful cross-trading between brokerage accounts. They also failed to disclose it was giving more favorable terms to the client buyer then the client seller in the trades – a conflict of interest in a transaction for a customer who it owed a fiduciary duty. As a result, MS was charged with violations of the Securities Act, the Advisers Act and the Investment Company Act.
A customer account held mortgage backed securities which were to be sold. Instead of following the rules for trading between customer accounts, the portfolio manager parked the securities in a broker account, who then later sold them back to the bank’s buyers at favorable terms.
SGAS, the brokerage firm who parked the securities and resold them to MS, was charged with aiding and abetting Morgan Stanley’s securities fraud as well as the failure to keep current ledgers (or records) accurately reflecting its assets and liabilities in its broker-dealer business.
This could be seen as another failure of the internal compliance process at banks. The trades came to the attention of the compliance and legal departments at Morgan Stanley but its internal investigation determined only that the trades were questionable but not problematic. The portfolio manager received only a reprimand for the conduct at issue here. When the SEC later inquired about the parking of securities at Morgan Stanley, they reopened the internal investigation and took additional action.
This compliance story reminded me of the one that came out of the Biorad litigation concerning whistleblower retaliation recently. There, the external law firm for Biorad conducted two investigations into suspected FCPA violations in China and concluded that there was no wrongdoing. Eventually, the General Counsel for Biorad was fired for believing that the company had potential liability in China.
There’s been no indication of a securities whistleblower in the Morgan Stanley case so far. However, with the SEC offering rewards of between 10 and 30 percent of monetary penalties over $1 million, it is possible that the voluntary investigation by the SEC into the practice of parking securities at Morgan Stanley could have been sparked by a whistleblower. The time frame of the trades was right – they were happening around the same time as the Dodd-Frank Act’s whistleblower program was being created at the SEC.
If you have evidence about an investment bank on or off Wall Street which is engaged in parking securities or failing to disclose a conflict of interest to customers, please contact one of our SEC whistleblower attorneys to discuss reporting it to the Securities and Exchange Commission.