By Chelsey Dulaney
Morgan Stanley will pay $4 million to settle charges that it
failed to stop a rogue Rochdale Securities LLC trader from
fraudulently buying $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 says, had received a customer order
for Apple stock but bought 1,000 times the number requested. The
trader, identified as David Miller of Rockville Centre, N.Y. in a
2012 U.S. attorney's office complaint, had hoped to profit if
Apple's stock price rose after the company announced its quarterly
earnings that day.
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 Morgan Stanley didn't conduct adequate due diligence before
raising the trading limits.
Apple's share price fell that day on disappointing results, 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. After
scrambling for a rescue, Rochdale closed last year after falling
below its capital requirements. Mr. Miller, meanwhile, was charged
with fraud and sentenced to 30 months in prison.
The SEC's investigation concluded 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," a representative for the company said.
Write to Chelsey Dulaney at Chelsey.Dulaney@wsj.com
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