Lawfuel – The Law Newswire – Washington, D.C., May 9, 2007 – The United States Securities and Exchange Commission today announced settled fraud charges against Morgan Stanley & Co. Incorporated (Morgan Stanley) for its failure to provide best execution to certain retail orders for over-the-counter (OTC) securities. In particular, 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. Morgan Stanley will pay $7,957,200 in disgorgement and penalties to settle the Commission’s charges. All of Morgan Stanley’s revenue from its undisclosed mark-ups and mark-downs will be distributed back to the injured investors through a distribution plan.
“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 Commission’s Division of Enforcement. “The duty to provide best execution is a fundamental duty of a broker-dealer. Broker-dealers must be diligent in their efforts to seek the most favorable terms for their customers’ orders.”
Elaine C. Greenberg, Associate Regional Director of the Commission’s Philadelphia Regional Office, stated, “The duty of best execution is not a static concept, but rather one that evolves with changes in technology. No matter what technology is used, broker-dealers must take care to ensure that orders are executed properly and in accordance with the duty to provide best execution.”
From Oct. 24, 2001, through Dec. 8, 2004, Morgan Stanley, a registered broker-dealer, failed to seek to obtain best execution for certain orders for OTC securities placed by retail customers of Morgan Stanley, Morgan Stanley DW, Inc. and third party broker-dealers that routed orders to Morgan Stanley for execution. As a result of this conduct, Morgan Stanley breached its duty of best execution with respect to these retail customers’ orders.
Morgan Stanley failed to provide best execution to more than 1.2 million executions valued at approximately $8 billion. Morgan Stanley recognized revenue of $5,949,222 through its improper use of undisclosed mark-ups and mark-downs. As a result, Morgan Stanley willfully violated Section 15(c)(1)(A) of the Securities Exchange Act of 1934, which prohibits broker-dealers from using manipulative, deceptive or fraudulent devices or contrivances to effect securities transactions.
Without admitting or denying the Commission’s findings, Morgan Stanley consented to the entry of an Order by the Commission that censures Morgan Stanley, and requires it to cease and desist from committing or causing any violations and any future violations of Section 15(c)(1)(A) of the Exchange Act. The Order also requires Morgan Stanley to pay disgorgement of $5,949,222 and prejudgment interest thereon of $507,978, and imposes a civil money penalty of $1.5 million. Morgan Stanley also will retain an independent distribution consultant to develop and implement a distribution plan for the disgorgement ordered, and will retain an independent compliance consultant to conduct a comprehensive review and provide a report on its automated retail order handling practices.
For more information, contact:
Daniel M. Hawke, Regional Director
Elaine C. Greenberg, Associate Regional Director
SEC Philadelphia Regional OfficeList your legal jobs on the LawFuel Network