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Morgan Stanley will pay $2 million to settle allegations that it failed to ensure that trades for a former First Republic Bank executive in the run-up to the bank’s collapse last year were not based on inside information.
The settlement, which was reached with state securities regulators in Massachusetts, was announced Friday morning.
No names of the former bank manager are mentioned and no one is accused of insider trading. But the stock sales detailed in the settlement match those of First Republic founder and former chairman James Herbert II, who sold more than $6.8 million worth of stock in February and March last year before a big decline of the bank’s shares took place, which were eventually completely destroyed. disappeared when the bank collapsed.
Herbert and other First Republic executives sold more than $10 million worth of stock in the early months of 2023 before the bank filed for bankruptcy, ultimately rendering the bank’s stock worthless. First Republic was then sold to JPMorgan Chase in a deal brokered by the Federal Deposit Insurance Commission.
No charges have been filed against Herbert or other bank executives in connection with the stock sale. The Securities and Exchange Commission and the Justice Department, both of which oversee 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 a class action lawsuit that alleges, among other things, that they traded on inside information while the bank was in bankruptcy.
Massachusetts’ securities regulator, led by its secretary of state, William Gavin, says Morgan Stanley breached numerous red flags that should have prompted further review before the transactions were completed. Brokers are required to implement reasonable controls to thwart stock transactions that could be illegally based on inside information.
The settlement describes Morgan Stanley’s fraud detection team, which the settlement alleges lacked the skills necessary to conduct basic Internet searches, as woefully inadequate.
Morgan Stanley did not admit or deny wrongdoing in the settlement, but did agree to review and improve its audit practices in addition to paying the fine. A spokeswoman for Morgan Stanley said the company is “pleased the matter has been resolved.”
It is the first major settlement with a regulator arising from last year’s regional banking turmoil, which resulted in three bank failures and tens of billions of dollars in losses to the Federal Deposit Insurance Fund.
Critics have said securities regulators have routinely done an inadequate job in monitoring insider trading by company executives. In late 2022, the SEC tightened the rules governing the schemes, called 10b5-1, that allow executives to buy and sell their company’s stock without oversight of insider trading.
However, executives are allowed to buy and sell shares of their own companies outside of 10b5-1 accounts, as long as they do not trade based on inside information. Stock sales by some 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.