Morgan Stanley Fined $2 Million Over Former First Republic Bank CEO's Stock Sales

Massachusetts securities regulators have fined Morgan Stanley $2 million for failing to properly monitor stock sales by a former First Republic Bank (FRB) executive in the lead-up to the bank's collapse in 2023. The announcement came from Secretary of the Commonwealth William F. Galvin on September 6, 2024.

According to a consent order filed by the Massachusetts Securities Division, Morgan Stanley did not adequately ensure that its client, a former CEO of First Republic, wasn't acting on insider information when selling millions of dollars worth of FRB shares before the bank's downfall.

The investigation revealed that the unnamed executive, referred to as "Customer One," sold over $6.8 million in FRB stock between February 2022 and March 2023. The final sale occurred just three days before a sharp decline in FRB's stock price, allowing the insider to avoid significant losses.

Regulators found several lapses in Morgan Stanley's compliance procedures:

1. The firm lacked specific policies for handling transactions by insiders of FDIC-reporting companies.
2. A notation identifying the client as an affiliate was removed, disabling several internal compliance checks.
3. Compliance officers conducted inadequate reviews, in one instance wrongly concluding there was no relationship between the customer and First Republic after just a minute of consideration.

The investigation also uncovered instances of off-channel communications by the Morgan Stanley managing director overseeing the executive's accounts, including failure to retain text messages on a personal device. This issue has previously resulted in a $125 million fine from the SEC.

In addition to the financial penalty, Morgan Stanley has been ordered to review its policies regarding the identification of senior officers of publicly-traded companies and provide training to its Massachusetts-registered broker-dealers on record-keeping and insider trading prevention.

This case highlights ongoing concerns about insider trading and the responsibilities of financial institutions in monitoring and preventing such activities, especially in the volatile banking sector.

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