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Regulation and Compliance > State Regulation

Morgan Stanley to Pay $2M Over Sale of First Republic Shares

By Melanie Waddell

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Massachusetts’ top securities regulator, William Galvin, has fined Morgan Stanley $2 million for failing to ensure its client, a former CEO and insider at First Republic, was not acting on material nonpublic information when he unloaded thousands of First Republic shares in the days and months prior to the bank’s collapse.

According to Galvin’s order, Morgan Stanley “employees failed to confirm the executive was not trading on the basis of inside information and also dismissed a series of red flags concerning the sale of more than $6.8 million in FRB stock by the insider.”

Morgan Stanley’s compliance manual prohibits its agents from buying or selling securities if they believe their client is trading while in possession of material non-public information.

Morgan Stanley “did not request or receive specific confirmation from any FRB executive,” including the former CEO, that the former CEO ”was not trading on the basis of MNPI,” the order states.

Off-Channel Communications Used

The Massachusetts Securities Division’s investigation also uncovered instances of off-channel communications by the Morgan Stanley managing director who serviced the First Republic CEO’s accounts, conduct for which Morgan Stanley has previously been fined $125 million by the SEC, Galvin’s office said.

In particular, such conduct included the failure to retain text messages on a personal device.

The former CEO “effected the sale of FRB stock from February 2022 through March 2023, with the last sale occurring three days before FRB stock prices sharply declined,” the consent order states.

“In doing so, the individual avoided a near complete loss. For its part, Morgan Stanley identified public statements made by the former CEO regarding First Republic operations that were later shown to be inaccurate,” according to the order.

At the time of the sales, “Morgan Stanley had no specific policies in place to address transactions made on behalf of insiders at companies” reporting to the Federal Deposit Insurance Corp. rather than the Securities and Exchange Commission, the complaint states.

Further, while Morgan Stanley was aware of the customer’s relationship with First Republic, it removed a notation identifying him as an affiliate, which caused several internal compliance checks to be removed.

When employees did review trades, they did not conduct meaningful reviews.

“In reviewing potential insider trading alerts, monitoring officers incorrectly concluded, after only one minute, that there was no relationship between the customer and First Republic,” the complaint states.

In addition to the $2 million fine, Morgan Stanley has been ordered to conduct an internal review of its policies and procedures concerning the identification and coding of senior officers of publicly traded companies and to provide training to all it its Massachusetts registered broker-dealers on record-keeping and the prevention of insider trading.

Melanie Waddell

@Think_MelanieW

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