Insider Trading
In Re: Morgan Stanley Smith Barney
Date: Sept. 6, 2024
Issue: Morgan Stanley Smith Barney’s consent order with the commonwealth of Massachusetts to resolve allegations that it failed to prevent a former First Republic Bank (FRB) executive from relying on insider information to sell stock months before the bank’s collapse.
Case Summary: Morgan Stanley agreed to pay the commonwealth of Massachusetts $2 million to resolve allegations that it failed to ensure a former FRB executive did not rely on insider information to sell stock months before the bank’s collapse.
From Feb. 22, 2022, to March 7, 2023, former FRB chairman James Herbert sold $6.8 million worth of First Republic stock in trades processed by Morgan Stanley. In March 2023, the Securities Division of the Office of the Secretary of the Commonwealth of Massachusetts (MSD) subpoenaed Morgan Stanley in its investigation into share sales made by FRB executives. MSD investigated whether Morgan Stanley violated the Massachusetts Uniform Securities Act by failing to prevent Herbert from engaging in insider trading during the sale. MSD did not identify Herbert in their consent order, but the trades detailed in the consent order match those Herbert reported to the Federal Deposit Insurance Corporation.
In their consent order, MSD concluded Morgan Stanley violated the Massachusetts Uniform Securities Act by failing to reasonably supervise agents, investment adviser representatives, or other employees to ensure compliance. MSD also alleged Morgan Stanley failed to reasonably address certain FRB insider sales.
MSD also alleged Morgan Stanley knew Herbert was a senior officer and insider of FRB servicing eighteen brokerage accounts and one advisory account for Herbert and his relatives. According to MSD, Herbert sold thousands of FRB shares from Morgan Stanley accounts in the six months before FRB’s collapse thereby avoiding a complete loss on FRB shares. Each request was reported through the FDIC’s Beneficial Ownership Filings System. On March 10, 2023, trading in FRB stock was as FRB’s share price sharply declined.
Additionally, MSD claimed Morgan Stanley lacked a specific process to review trades by insiders of FDIC-regulated institutions rather than the U.S. Securities and Exchange Commission. Each of Herbert’s transactions was monitored by Morgan Stanley’s Executive Financial Services (EFS) team to ensure compliance with applicable securities laws. However, the EFS team determined review of Herbert’s Oct. 22 trade was not required because FRB’s securities were exempted from the SEC safe harbor provisions. As Morgan Stanley lacked a review process for insiders like Herbert, trades through March 2023 were allegedly processed like ordinary transactions. Moreover, MSD declared despite understanding the facts and circumstances related to Herbert’s insider status, and experience servicing insider accounts, no one at Morgan Stanley was aware of Herbert’s transactions before they were executed. This resulted in no one escalating the matter or seeking further guidance on how the trade in FRB stock should be handled.
Finally, MSD claimed Morgan Stanley failed to keep accurate records. According to MSD, Morgan Stanley’s policies prohibited the use of non-firm-approved systems for electronic communications regarding Firm business. However, MSD claimed a Morgan Stanley employee engaged in business-related communications using an unapproved method of communication.
Bottom Line: Morgan Stanley did not admit to or deny any of the allegations.
Document: Consent Order
