Morgan Stanley Settles ‘Fictitious Sales’ Charges
Morgan Stanley had inadequate supervisory systems and controls to detect and deter unlawful conduct that occurred repeatedly over 18 months, the U.S. Commodity Futures Trading Commission (CFTC) found. The firm settled charges that, over that period, it unlawfully executed, processed, and reported numerous off-exchange futures trades to the Chicago Mercantile Exchange (CME) and Chicago Board of Trade (CBOT) as exchanges for related positions (EFRPs). Under the settlement, Morgan Stanley will pay a $5 million civil monetary penalty and cease and desist from further violations of the Commodity Exchange Act (CEA) and CFTC regulations, as charged.
According to the CFTC order, because the futures trades were executed noncompetitively and not in accordance with exchange rules governing EFRPs, they constituted “fictitious sales” and resulted in the reporting of non-bona fide prices, in violation of the CEA and CFTC regulations. The CFTC also found that Morgan Stanley had related supervisory and recordkeeping violations.
According to the CFTC, from at least April 18, 2008 through October 29, 2009, Morgan Stanley noncompetitively executed numerous futures trades and improperly reported them as EFRPs, since they did not have the required corresponding cash or OTC derivative positions.
The CFTC found that Morgan Stanley’s supervisory systems and internal controls were not adequate to detect and deter the noncompetitive trading of futures contracts improperly designated as EFRPs. For example, the CFTC said, although Morgan Stanley’s Futures Operations department had the responsibility to report EFRPs to the CME and CBOT, that department was not required to verify that the EFRPs had the required corresponding related cash or OTC derivative positions, nor was any other operations department required to do so. The agency also found that Morgan Stanley failed to ensure that its employees involved in the execution, handling and processing of EFRPs understood the requirements for executing bona fide EFRPs. Moreover, the order finds that Morgan Stanley lacked sufficient surveillance systems to identify trades improperly designated as EFRPs. The order also found that Morgan Stanley failed to designate the trades as EFRPs on all orders, records, and memoranda pertaining to EFRPs, as required.