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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.
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.