Morgan Stanley Investment Management settles after SEC 'parking' charge
The Securities and Exchange Commission has announced that Morgan Stanley Investment Management has agreed to pay $8.8 million to settle charges that one of its portfolio managers unlawfully conducted prearranged trading known as “parking” that favored certain advisory client accounts over others.
The portfolio manager and a brokerage firm trader who assisted the schemes agreed to be barred from the securities industry and pay penalties in the settlement. The brokerage firm, SG Americas, agreed to pay more than $1 million to settle the SEC’s charges.
An SEC investigation found that while managing accounts that needed to liquidate certain positions, Sheila Huang arranged sales of mortgage-backed securities to SG Americas trader Yimin Ge at predetermined prices that would enable her to buy back the positions at a small markup into other accounts advised by Morgan Stanley. Huang also sold additional bonds at above-market prices to avoid incurring losses in certain accounts, but she repurchased them at unfavorable prices in a fund that she managed without disclosing it to the disadvantaged fund client.
“Instead of playing by the rules, Huang engaged in prearranged trading schemes that benefited some clients while harming others,” said Marshall S. Sprung, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “Morgan Stanley failed to uncover Huang’s misconduct due to its lack of supervisory oversight and failure to implement policies specifically addressing prearranged trades.”
According to the SEC’s orders instituting settled administrative proceedings:
• Huang, who no longer works at Morgan Stanley, conducted the schemes in 2011 and 2012.
• Huang effected prearranged transactions for five sets of bond trades. She sold them to Ge at the highest current independent bid price available for the securities, and executed the repurchase side of the cross trade at a small markup over the sales price.
• By not crossing these positions at the midpoint between best bid and offer, Huang generally allocated the full benefit of the market savings to its purchasing clients, even though the buying and selling clients were owed the same fiduciary duty.
• By interposing a broker to effectuate these cross trades, Huang evaded internal cross trade requirements and caused violations of regulatory prohibitions on cross trades applicable to registered investment companies.
• In the additional set of prearranged trades to avoid incurring losses in certain accounts, Huang sold certain bonds at above-market prices to SG Americas and simultaneously sold two bonds from an unregistered MSIM fund to SG Americas at below market prices for no legitimate business purpose. The trades offset the above-market prices of the other bonds Huang sold.
• At the time of the sale to SG Americas, Huang prearranged their repurchase by an unregistered fund she managed and advised at Morgan Stanley. Through these trades, Huang moved approximately $600,000 in previously unrealized losses from the selling accounts to the unregistered Morgan Stanley fund.
The SEC’s order finds that Huang willfully violated Sections 17(a)(1) and (3) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a) and (c). She also willfully aided and abetted and caused violations of Sections 206(1) and (2) of the Investment Advisers Act of 1940. Morgan Stanley willfully violated Section 17(a)(3) of the Securities Act and Sections 206(2) and 206(4) of the Advisers Act as well as Rule 206(4)-7. Without admitting or denying the findings, Huang agreed to pay a $125,000 penalty and is barred from the securities industry for at least five years, and Morgan Stanley agreed to pay an $8 million penalty and reimburse a total of $857,534 to certain client accounts that were harmed by Huang’s misconduct.
A separate SEC order finds that SG Americas willfully violated Section 17(a) of the Exchange Act and Rule 17a-3(a)(2) for failing to make and keep accurate books and records and failing to supervise Ge, who willfully aided and abetted Huang’s violations. Without admitting or denying the findings, SG Americas agreed to pay an $800,000 penalty and $211,093 in disgorgement and prejudgment interest, and Ge – who no longer works at the firm – agreed to pay a $25,000 penalty and is barred from the securities industry for at least three years.
The SEC’s continuing investigation is being conducted by Joshua M. Newville and Brian Fitzpatrick of the Asset Management Unit along with Neil Hendelman of the New York Regional Office. The case is being supervised by Panayiota K. Bougiamas of the Asset Management Unit.