Morgan Stanley fined $4M for allowing rogue Apple stock trades

Posted:
in AAPL Investors edited December 2014
Investment bank Morgan Stanley on Wednesday agreed to pay the U.S. Securities and Exchange Commission $4 million in fines for violating the market access rule when it allowed a rogue trader to fraudulently purchase some $1 billion of Apple stock in 2012.

Stock


Citing a release from the SEC, CNBC reports Morgan Stanley has accepted a $4 million penalty for failing to effectively monitor credit limits for customer firm Rochdale Securities, an employee of which was able to make illegitimate transactions far exceeding the company's daily aggregate trading limit.

In October 2012, a trader at now-defunct Rochdale named David Miller inflated a customer's $1 million order of 1,625 Apple shares to 1,625,000 shares, hoping to skim earnings off the top if AAPL prices rose. The SEC says Miller traded about $525 million worth of Apple stock throughout a one-day period, much higher than Rochdale's set limit of $200 million.

"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," the bank said in a statement.

Broker-dealers like Morgan Stanley are responsible for setting up appropriate risk control measures for customers accessing the market, but did not do so with Miller, the SEC said. Records show Miller was granted clearance to boost Rochdale's trade caps to $500 million, then later to $750 million. According to the SEC, the bank did not conduct due diligence in validating the massive credit increases.

"Broker-dealers become important gatekeepers when they provide customers direct access to our securities markets, and in this case Morgan Stanley did not live up to that responsibility," said Director of the SEC Enforcement Division Andrew Ceresney in a prepared statement. "Morgan Stanley failed to have reasonable controls in place to mitigate the risks associated with granting market access to a customer."

When Apple stock slumped, Miller's plan unraveled and he falsely claimed his trades were made in error. This left Rochdale saddled with a subsequent $5.3 million loss that ultimately put the firm below net capital requirements for securities trading, thus forcing it to close up shop.

In 2013, a federal court slapped Miller with charges of wire fraud and conspiracy in 2013, landing him a jail sentence of 30 months.
«1

Comments

  • Reply 1 of 38
    They're all crooks on Wall Street
  • Reply 2 of 38
    I've never really trusted Morgan Stanley.

    (I wouldn't doubt it if they say Apple stock should be sold just so that they can buy some. They say anything and the market reacts).
  • Reply 3 of 38
    This is the only incident being reported due to a financial loss being experienced . How many more trades have been ignored by the SEC?

    Also, Morgan Stanley "accepted" the $4 million fine? Did it have a choice? If so, why? Could the fine been larger? $4 million is less than 0.5% of $1 billion.

    If Morgan Stanley is still too big to fail, it is long overdue to break up the bank. Otherwise, the bank will continue to do whatever it wants however it wants.
  • Reply 4 of 38
    lkrupplkrupp Posts: 10,163member
    Quote:

    Originally Posted by leavingthebigG View Post



    This is the only incident being reported due to a financial loss being experienced . How many more trades have been ignored by the SEC?



    Also, Morgan Stanley "accepted" the $4 million fine? Did it have a choice? If so, why? Could the fine been larger? $4 million is less than 0.5% of $1 billion.



    If Morgan Stanley is still too big to fail, it is long overdue to break up the bank. Otherwise, the bank will continue to do whatever it wants however it wants.



    Hey big bank hater, wait till you get a load of the omnibus spending bill being rushed through congress. It rolls back almost every banking regulation passed after the great recession, in spades. Get ready to jump off a bridge because your ilk ain’t gonna like what happens then.

  • Reply 5 of 38
    Originally Posted by lkrupp View Post

    ...the omnibus spending bill being rushed through congress.



    Hopefully it’s ignored and a universal CR is passed instead.

  • Reply 6 of 38
    genovellegenovelle Posts: 1,414member
    lkrupp wrote: »

    Hey big bank hater, wait till you get a load of the omnibus spending bill being rushed through congress. It rolls back almost every banking regulation passed after the great recession, in spades. Get ready to jump off a bridge because your ilk ain’t gonna like what happens then.

    That will be SO vetoed!
  • Reply 7 of 38
    This is the kind of Mickey Mouse gaming of the system that securities traders do all the time to stocks like AAPL.
  • Reply 8 of 38
    Quote:

    Originally Posted by lkrupp View Post

     



    Hey big bank hater, wait till you get a load of the omnibus spending bill being rushed through congress. It rolls back almost every banking regulation passed after the great recession, in spades. Get ready to jump off a bridge because your ilk ain’t gonna like what happens then.




    Must be the 100% bought and paid for GOP doing it.  I hate both parties but they are definitely the worse of the 2 evils.

  • Reply 9 of 38
    Why does every damn thread turn political?:no:
  • Reply 10 of 38
    lkrupplkrupp Posts: 10,163member
    Quote:

    Originally Posted by frankie View Post

     



    Must be the 100% bought and paid for GOP doing it.  I hate both parties but they are definitely the worse of the 2 evils.




    And there’s not a damn thing you can do about it... accept bitch.

  • Reply 11 of 38
    lkrupplkrupp Posts: 10,163member
    Quote:

    Originally Posted by anantksundaram View Post



    Why does every damn thread turn political?image



    Because banking regulation IS political.

  • Reply 12 of 38
    feynmanfeynman Posts: 1,087member

    Aren't they owned by Bank of America these days?

  • Reply 13 of 38
    Morgan Stanley probably still made money off this considering Apple hit new highs in recent months. $4mm is a slap on the wrist to them.
  • Reply 14 of 38
    I remember that news... everyone was expecting Apple to rise, instead it fell. David Miller had to have tossed his cookies in the waste basket when the price zigged instead of zagged.
  • Reply 15 of 38
    radarthekatradarthekat Posts: 3,536moderator
    feynman wrote: »
    Aren't they owned by Bank of America these days?

    That's Merrill Lynch.
  • Reply 16 of 38
    MarvinMarvin Posts: 14,833moderator
    Also, Morgan Stanley "accepted" the $4 million fine? Did it have a choice? If so, why? Could the fine been larger? $4 million is less than 0.5% of $1 billion.

    It wasn't Morgan Stanley's $1b, they just allowed the trade. Morgan Stanley would have got a small fee for the trade. The $1b didn't even exist. Rochdale only had $3.5m in capital but they can leverage it:

    http://www.cityindex.co.uk/cfd-trading/what-is-cfd-trading.aspx

    "CFDs are traded on leverage, meaning you pay only a small fraction of the total trade value to open your position rather than paying for it in full, this is known as margin. For example, you can trade Vodafone shares by depositing a margin of just 5%. Our margins for the UK 100 and Wall Street start at just 1.5%, while margins for our major currency CFDs start from just 1%.

    You can use leverage to magnify your return on investment as your full trade exposure is much more than the initial deposit required for your trade. However, your losses are magnified in exactly the same way if the market moves against you and can lead to losses exceeding your initial outlay. Please ensure you fully understand the risks involved and seek independent advice if necessary. At City Index, we offer a range of risk management tools to help protect your trades against potential losses."

    To make a $1b trade with $3.5m capital means a crazy leverage amount and obviously they lost fast. They'll have corrected the trade quickly but even small changes can mean huge losses.

    It wasn't just Miller involved, the customer was in on it too:

    http://www.bloomberg.com/news/2013-11-20/ex-rochdale-securities-trader-sentenced-to-30-months.html

    "The government alleged that Miller placed an order on Oct. 25, 2012, for 1.6 million shares of Apple on behalf of a customer who wasn’t named in court filings and acted as a co-conspirator. As part of the scheme, the co-conspirator deliberately wrote the order in a way that allowed Miller to claim he had misinterpreted it, and that the customer had really meant to buy a much smaller amount, according to the government. If the trade proved profitable, Miller and the co-conspirator would have shared the profits, prosecutors said."

    That's not to say Morgan Stanley didn't profit from it. They could have executed the trade in a way to manipulate the market:

    http://www.foxbusiness.com/2014/08/05/dark-pool-scrutiny-expands-to-include-goldman-morgan-stanley/

    They could have done their own trading based on the knowledge of that amount of orders going in. If you are engaged in business where all everyone is playing with is money and no products, the motive is simply to take money from everyone else by whatever means necessary. Leveraging should be restricted massively. Why should someone be allowed to pretend they have 20-30x the assets they actually have (or 285x in the case of Rochdale)?
  • Reply 17 of 38
    Originally Posted by anantksundaram View Post

    Why does every damn thread turn political?image

     

    Because people are stupid and the threads that belong in PO never get put there.

  • Reply 18 of 38
    kibitzerkibitzer Posts: 1,114member
    Why does every damn thread turn political?:no:
    You gotta understand that this involves much more than politics. The big banks have sneaked in a way to remove some critical restrictions on their derivative trading activities. Remember derivatives? The stuff in October 2008 that blew up the markets, almost killed the banks, threatened a financial meltdown and threw the global economy into the crapper?
  • Reply 19 of 38
    Originally Posted by Kibitzer View Post

    You gotta understand that this involves much more than politics. The big banks have sneaked in a way to remove some critical restrictions on their derivative trading activities. Remember derivatives? The stuff in October 2008 that blew up the markets, almost killed the banks, threatened a financial meltdown and threw the global economy into the crapper?

     

    I say let ‘em. If they want to collapse their own system again, that’s fine by me. If they expect to be (questionably legally) saved from bankruptcy again, we’ll laugh all the way to the... well, you know.

  • Reply 20 of 38
    Quote:

    Originally Posted by lkrupp View Post

     
    Quote:
    Originally Posted by anantksundaram View Post



    Why does every damn thread turn political?image



    Because banking regulation IS political.


    Anything can be made political. The only question is the appropriateness of doing so at the drop of a hat in a tech forum. The fact that something can be done doesn't mean that it should be.

     

    ?As an aside, 'too big to fail' has certainly become a political issue (as has most other things), but it's fundamentally an economic issue. If, indeed, TBTF is real, then it is valid to worry that there may be systemic risks. If there are systemic risks, then it is valid to ask whether we should do something about it, and if so, what. Those are important macroeconomic questions. If your personal view is that TBTF makes no sense, and that there are no systematic risks and, even if there were such risks induced by TBTF, that we should do nothing about it then it's certainly be a useful discussion to hear your pov on why.

     

    Your knee-jerk response was to simply get into usual GOP v. Democrats crap. It's certainly your prerogative to do that, but let's aver that it's a damn waste of time on both sides.

Sign In or Register to comment.