Morgan Stanley & Co. Inc., the world’s second largest securities firm, will pay $7.9 million for its failure to provide best execution to certain retail orders for over-the-counter securities, the Securities and Exchange Commission announced today. Morgan Stanley embedded undisclosed mark-ups and mark-downs on certain retail OTC orders processed by its automated market-making system and delayed the execution of other retail OTC orders, for which Morgan Stanley had an obligation to execute without hesitation.
“By recklessly programming its order execution system to receive amounts that should have gone to retail customers, Morgan Stanley violated its duty of best execution and defrauded its customers,” said Linda Chatman Thomsen, Director of the regulator’s Division of Enforcement. “Best execution is a fundamental duty of a broker- dealer,” Thomsen, added. “Morgan Stanley violated its duty” and committed fraud by setting-up its order-execution system “to receive amounts that should have gone to retail customers.”
The company began overcharging clients after embedding undisclosed fees on some trades when it adopted a new computer system to handle transactions in 2001, the SEC said. The lapses affected more than 1.2 million transactions valued at about $8 billion from 2001 through 2004. A Morgan Stanley trader stumbled onto the problem in December 2004 when unusually high trading in a company’s stock generated a $400,000 profit within a few minutes, the SEC said. The trader alerted his supervisor, and by that afternoon a technician pinpointed the programming “error”.
All of Morgan Stanley’s revenues from its undisclosed mark-ups and mark-downs will be distributed back to the injured investors through a distribution plan, according to the SEC. The order requires Morgan Stanley to pay disgorgement of $5,949,222, prejudgment interest thereon of $507,978, and imposes a civil money penalty of $1.5 million.
Without admitting or denying the commission’s findings, Morgan Stanley consented to the entry of an order by the Commission that censures Morgan Stanley.“$8 million isn’t enough of an impact on their revenue or bottom line to have me worried too much,” said Jeffery Harte, an analyst at Sandler O’Neill & Partners in Chicago who recommends buying Morgan Stanley stock. “$8 million is a rounding error.”
The SEC may examine other firms’ systems for similar problems, said Elaine Greenberg, an SEC official in Philadelphia overseeing the case.
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