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Morgan Stanley is paying $2mn to settle allegations that it failed to ensure trades it completed for a former top executive of First Republic Bank in the run-up to the bank’s collapse last year were not based on insider information.
The settlement, which is with state securities regulators in Massachusetts, was announced on Friday morning.
It does not name the former bank executive nor charge anyone with insider trading. But the stock sales detailed in the settlement match those of First Republic’s founder and former executive chair James Herbert II, who sold more than $6.8mn shares in February and March of last year, before a large decline in the bank’s shares, which were eventually completely wiped out when the bank collapsed.
Herbert and other First Republic executives sold more than $10mn worth of shares in the early months of 2023 before the bank failed, which ultimately rendered the bank’s shares worthless. First Republic was subsequently sold to JPMorgan Chase in a deal that was brokered by the Federal Deposit Insurance Commission.
No charges have been brought against Herbert or any other bank executives connected to the stock sales. The Securities and Exchange Commission and the Department of Justice, both of which police illegal insider trading, did not return requests for comment. A spokesperson for Herbert declined to comment.
Herbert and other former First Republic executives have been named in class-action suit that alleges among other things that they traded on insider information as the bank was failing.
The Massachusetts securities regulator, which is run by its secretary of state, William Gavin, says Morgan Stanley blew through numerous red flags that should have triggered further review before completing the trades. Brokers are required to maintain reasonable controls to thwart stock transactions that could be illegally based on insider information.
The settlement paints Morgan Stanley’s fraud detection team, which the settlement says lacked the skills needed to do basic internet searches, as woefully inadequate.
Morgan Stanley did not admit or deny wrongdoing in the settlement, but along with paying the fine agreed to review and improve its monitoring practices. A Morgan Stanley spokeswoman said the firm is “pleased to have resolved the matter.”
It is the first big settlement with a regulator to come out of last year’s regional banking turmoil that resulted in three bank failures and tens of billions of dollars of losses for the Federal Deposit Insurance Fund.
Critics have said securities regulators have routinely done an inadequate job on policing insider trading by corporate executives. In late 2022, the SEC tightened the rules that govern the plans, called 10b5-1, that allow executives to buy and sell shares of their company without scrutiny of acting on insider information.
Executives, though, are allowed to buy and sell shares of their own companies outside 10b5-1 accounts, as long as they are not acting on inside information. Stock sales by a number of executives and lawmakers in the run-up to last year’s regional banking crisis have raised concerns that more needs to be done to limit insider trading.
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