The week of May 9, twice within three days, the Securities and
Exchange Commission announced sizable financial settlements in two
trading-related cases. In one, a unit of Zurich Financial Services
agreed to pay a total of $12.8 million in profit disgorgement and a
civil money penalty for aiding hedge funds in improper market
timing. (Excerpts from the administrative proceeding appeared in
the May 14 Securities Industry News.) In the other case,
Morgan Stanley agreed to pay out just under $8 million for failures
to provide best execution on retail over-the-counter securities
orders. The firm violated "a fundamental duty of a broker-dealer,"
according to Linda Thomsen, director of the SEC's division of
enforcement.  "By
recklessly programming its order execution system to receive
amounts that should have gone to retail customers, Morgan Stanley
violated its duty of best execution and defrauded its customers,"
she said. "Broker-dealers must be diligent in their efforts to seek
the most favorable terms for their customers' orders." The SEC's
cease-and-desist and censure order, detailing compliance and
technology-oversight weaknesses and on which Morgan Stanley neither
admitted nor denied wrongdoing, is excerpted here.
1. This matter arises from Morgan Stanley's [MS & Co.'s]
failure to provide best execution to certain retail orders for
over-the-counter securities during the time period of Oct. 24, 2001
through Dec. 8, 2004. MS & Co., as a broker-dealer, had a legal
duty to seek to obtain for its retail customers' orders the most
favorable terms reasonably available under the circumstances,
taking into account price, order size, trading characteristics of
the security, speed of execution, clearing costs, and the cost and
difficulty of executing an order in a particular market, as well as
the potential for price improvement (i.e., best execution).
2. MS & Co. breached the duty of best execution on certain
retail OTC orders in three ways. First, on October 24, 2001, MS
& Co. embedded undisclosed markups and markdowns on certain
not-held retail orders without retail customers' prior consent to
do so. |
