The Securities and Exchange Commission (SEC) imposed a penalty against Morgan Stanley (NYSE:MS) for its failure to uphold credit limits for a customer firm with rogue trader who committed fraud trading the shares of Apple Inc. (NASDAQ:AAPL).
Morgan Stanley failed to uphold credit limits
According to the SEC, Morgan Stanley (NYSE:MS) violated market access rule when it failed to uphold credit limits for the client firm. The global financial services company agreed to pay a $4 million fine to settle the violation.
Morgan Stanley (NYSE:MS) offers institutional clients with direct market access through an electronic trading desk. The investigation of the SEC found that the company did not have the required risk management controls to prevent the rogue trader from entering orders that exceeded pre-set trading limits.
The SEC explained that the market access rule requires broker dealers to have adequate risk controls in place before providing customers access to the markets.
The commission emphasized that the written supervisory procedures of Morgan Stanley (NYSE:MS) did not provide reasonable guidance for electronic trading desk personnel who determine whether or not to increase customer trading thresholds.
Andrew Ceresney, Director of the SEC Enforcement Division said, “Broker-dealers become important gatekeepers when they provide customers direct access to our securities markets, and in this case Morgan Stanley did not live up to that responsibility. Morgan Stanley failed to have reasonable controls in place to mitigate the risks associated with granting market access to a customer.”
SEC investigation
The rogue trader worked at Rochdale Securities and routed a series of orders to purchase shares of Apple Inc. (NASDAQ:AAPL) through the electronic trading desk of Morgan Stanley (NYSE:MS) on October 25, 2012.
The SEC found that the orders for Apple stock were worth approximately $525 million during that day. It significantly exceeded Rochdale’s $200 million pre-set aggregate daily trading limit at Morgan Stanley (NYSE:MS).
The electronic trading desk of Morgan Stanley (NYSE:MS) initially increased Rochdale’s limit to $500 million and later to $750 million in order to execute the orders. The trading limit was increases without conducting due diligence to ensure the credit increases were warranted, according to the SEC.
The SEC found that the rogue trader exploited the market access and committed fraud without the knowledge of Morgan Stanley (NYSE:MS). He intentionally increased the amount of order from 1,625 to 1,625,000 shares to make profits from the excess shares of the stock price of Apple Inc. (NASDAQ:AAPL) increased, but the stock declined later that day.
As a result, Rochdale suffered $5.3 million in losses and subsequently fell below its net capital requirements to trade stock. The firm closed its business operations last year. The rogue trader made a false claim that he made a mistake in placing the orders. He was charged with fraud and sentenced to 30 months and prison.
