Today the Securities Exchange Commission announcedwill pay $7.96 million and penalties to settle the SEC’s charges against the firm for failing to provide best execution to clients. More specifically, the SEC charged Morgan with undisclosed mark-ups and mark-downs on certain retail over-the-counter orders processed by its automated market-making system, as well as delayed execution of other retail OTC orders.
“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,” said Linda Chatman Thomsen, Director of the Commission’s Division of Enforcement.
According to SEC release, from Oct. 24, 2001, to Dec. 8, 2004, the brokerage firm failed to provide best execution on more than 1.2 million order executions valued at approximately $8 billion. The SEC said Morgan Stanley recognized revenue of around $5.9 million through its improper use of undisclosed mark-ups and mark-downs, “willfully violating,” Section 15 (c) (1) (a) of the Securities Exchange Act of 1934, which prohibits b/d’s from using manipulative, deceptive or fraudulent devices or contrivances to effect securities transactions.
The brokerage firm neither admitted nor denied the SEC’s findings, but said in a statement, “Morgan Stanley is pleased to settle this matter. The firm has corrected the programming issue, established new internal controls, and the process for client reimbursement.”
Consenting to the entry of an order that censures Morgan Stanley, the firm will also pay disgorgement of $5.9 million, plus interest of $507,978, and civil penalties of $1.5 million.