Financial institution Morgan Stanley faced a $2M penalty for allegations related to improper stock sales involving the former CEO of First Republic.
In a recent development, Morgan Stanley has been fined $2 million by Massachusetts securities regulators for failing to adequately monitor stock sales by the former CEO of First Republic Bank (FRB). The regulatory action stems from an investigation into insider trading conduct and Morgan Stanley’s compliance failures.
The former CEO, identified as James Herbert II, who founded First Republic in 1985 and served as CEO for 36 years, sold over $6.8 million in FRB stock from February 2022 to March 2023. The sales occurred just three days before the bank's stock price collapsed, allowing the executive to potentially avoid a near-complete loss.
Morgan Stanley's monitoring system flagged the former CEO's recent sales as a potential case of insider trading only after FRB's stock price collapsed. The compliance lapses highlighted in the consent order involve Morgan Stanley's wealth unit, specifically a California branch serving ultra-high-net-worth clients.
The trades were overseen by a managing director who was a registered agent of Morgan Stanley in Massachusetts since 2008 and now serves as a wealth adviser in California. However, Morgan Stanley's employees did not confirm whether the former CEO was acting on inside knowledge, despite the managing director's instances of off-channel communications, including a failure to retain text messages.
Moreover, Morgan Stanley had no specific policies to address transactions made on behalf of insiders at companies reporting to the Federal Deposit Insurance Corp. This is concerning given that the Electronic Filing System (EFS) team determined that the CEO's trades did not require their approval due to FRB's shares being regulated by the Federal Deposit Insurance Corp.
The consent order also notes that Morgan Stanley identified public statements made by the CEO regarding FRB's operations that were later found to be inaccurate. Additionally, a notation identifying the former First Republic CEO as an affiliate was removed, causing compliance checks to be bypassed.
This is not the first time Morgan Stanley has faced regulatory scrutiny. In 2022, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission fined the firm $200 million for its use of unapproved messaging platforms and its inability to keep track of those communications.
In response to the recent findings, Morgan Stanley has been ordered to review its policies and provide training to prevent such lapses in the future. The firm has also offered to settle with the regulator without admitting or denying the findings stated in the consent order.
[1] Source: The Wall Street Journal
- Morgan Stanley, a well-known financial institution, is actively reviewing its policies regarding investing and business practices, especially in the case of insiders at companies under the Federal Deposit Insurance Corp, following a regulatory action and a fine of $2 million by Massachusetts securities regulators for compliance failures.
- In the realm of business and finance, Morgan Stanley's ultra-high-net-worth clients' branch in California faced scrutiny for failing to adequately monitor stock sales by a former CEO, potentially allowing insider trading conduct to go unchecked, as seen in the case of James Herbert II and First Republic Bank.
