By Chelsey Dulaney
Morgan Stanley & Co. LLC will pay $4 million to settle
charges that it failed to stop a rogue Rochdale Securities LLC
trader from fraudulently trading $525 million in Apple stock in
2012, the Securities and Exchange Commission said Wednesday.
The SEC on Wednesday penalized Morgan Stanley for violating a
market access rule when it failed to uphold credit limits for
Rochdale when a trader in October 2012 routed a series of orders to
purchase Apple stock to its electronic trading desk, which allows
institutional customers direct market access.
The Rochdale trader, the SEC alleges, had received an order for
stock in Apple but bought 1,000 times the number of shares
requested in hopes of making money on the excess shares if Apple's
stock price increased.
The amount exceeded Rochdale's daily trading limit of $200
million, but Morgan Stanley's desk increased Rochdale's trading
limit, first to $500 million and later to $750 million. The SEC
said that Morgan Stanley didn't conduct adequate due diligence
before upping the trading limits.
Apple's share price fell that day, and Rochdale, a Stamford,
Conn. institutional broker and equity-research firm that employed
prominent analyst Richard Bove, took a $5.3 million loss on the
unauthorized trades, causing the business to fall below its capital
requirements and close last year. The trader, meanwhile, has been
charged with fraud and sentenced to 30 months in prison
The SEC's investigation found that Morgan Stanley didn't have
sufficient risk management controls in place to prevent the
trades.
Morgan Stanley didn't admit or deny the findings and has since
updated its procedures, the company said Wednesday.
"Morgan Stanley has updated its written procedures to address
the issue identified in the SEC's order and is pleased to have this
matter behind it," said Mark Lake, a spokesman for Morgan
Stanley.
Write to Chelsey Dulaney at Chelsey.Dulaney@wsj.com
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