Morgan Stanley Settles With SEC Over Misuse Of Insider Information

by Glen Shapiro, LawAndTax-News.com, New York

30 June 2006

The US Securities and Exchange Commission on Tuesday announced the institution and simultaneous settlement of an enforcement action against Morgan Stanley and Co. Incorporated and Morgan Stanley DW Inc.

According to the SEC, despite the legal requirements to do so, Morgan Stanley for years failed to maintain and enforce adequate written policies and procedures to prevent the misuse of material nonpublic information, commonly referred to as inside information.

Due to a systemic breakdown in this critical compliance function, Morgan Stanley failed to conduct any surveillance of a massive number of employee accounts held at the firm and trading in certain securities in those and other accounts.

Moreover, Morgan Stanley's written policies failed to provide adequate guidance to Morgan Stanley personnel charged with conducting surveillance, and the company employed inadequate controls with respect to certain aspects of its Watch List maintenance.

As part of the settlement, Morgan Stanley has agreed to pay a $10 million penalty.

"Establishing and enforcing adequate written policies and procedures to detect potential insider trading at securities firms is vital," explained Linda Chatman Thomsen, Director of the SEC's Division of Enforcement, adding that:

"Firms must devote sufficient resources and attention to this critical area. Neglecting this compliance function is not an option."

Morgan Stanley and Co. Incorporated and Morgan Stanley DW Inc., both of which are registered broker-dealers and investment advisers, agreed, without admitting or denying the Commission's findings, to the entry of a Commission Order censuring them, ordering them to cease and desist from committing or causing any violations and any future violations of the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940, and ordering them to pay a $10 million penalty.

The Commission Order also requires Morgan Stanley to retain an independent consultant to conduct a comprehensive review of the firm's policies, practices and procedures to prevent the misuse of material nonpublic information.

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