NASD's National Adjudicatory Council Fines Morgan Stanley, Inc. $495,000 for Manipulation and Locked and Crossed Markets; Fines Firm Traders
Nancy A. Condon
Washington, D.C.—NASD Regulation’s National Adjudicatory Council (NAC) today censured and fined New York-based Morgan Stanley & Co., Inc., $495,000 for manipulating the prices of nine securities that underlie the Nasdaq 100 Index (NDX) on two separate "expiration Fridays" in 1995 and for causing locked and crossed markets to occur in nine stocks. The NDX options expire on the third Friday of every month.
Following independent review, the NAC affirmed the findings by NASD’s Market Regulation Committee (MRC) that six Morgan Stanley traders, including the firm’s then-OTC Desk Head Trader, manipulated the prices of the nine securities. David Robert Slaine, the former head of OTC trading at Morgan Stanley, and five other traders – Thomas Anthony Crocamo, Carl DeFelice, Joseph Louis Ferrarese, Peter William Ferriso, Jr., and Charles McMichael Simonds – were each fined $2,500.
The NAC dismissed the charge of manipulation against Robert Scott Ranzman, thereby eliminating the sanctions imposed against him.
The cash settlement value of the NDX options was, at the time, determined by the opening print price for each of the 100 stocks. (Since April 1996, the cash settlement value of NDX options has been based on a volume-weighted average of the prices in each of the component securities, as reported during the first five minutes of trading.) Morgan Stanley, in order to ensure that the firm’s Program Trading Desk did not suffer a loss when NDX options expired, had an arrangement with the firm’s OTC Desk to sell to the Program Trading Desk the exact amount of each security necessary to close out pre-existing stock positions established to hedge investments in NDX options. As part of this agreement, the Morgan Stanley OTC Desk would sell the securities to the firm’s Program Trading Desk at the opening print price – the first reported trade in each of the securities. As a result of this arrangement, Morgan Stanley’s OTC Desk established significant short positions in these nine securities.
The NAC affirmed the finding by the MRC that, in connection with this arrangement, prior to the market openings on March 17, 1995 and October 20, 1995, Morgan Stanley’s OTC Desk improperly and fraudulently raised the prices it quoted for these nine securities, artificially moving the market for each security – and the opening print price in that security – higher. The firm raised its bids without purchasing any stock prior to the opening.
The intra-firm transactions enabled the Program Trading Desk to close its hedge positions at a price (in this case, the opening print price) that would prevent substantial losses, and the stock manipulation enabled the OTC Desk to minimize any losses it might have faced in covering its short position.
The NAC found that the prices of four securities were manipulated on March 17, 1995, and the prices of a separate set of five securities were manipulated on October 20, 1995.
Morgan Stanley aggressively raised its bid for the nine securities, before the market opened, creating the last new inside bid price prior to the opening. Morgan Stanley decreased its bid for every one of the nine securities within minutes after the market opened, and in some instances without buying any stock at all.
In addition, Morgan Stanley violated the NASD's rule regarding locked and crossed markets. A locked market occurs when the inside bid price equals the inside sell price in the same security, and a crossed market occurs when the inside bid price is greater than the inside sell price of a security. NASD rules require firms to make reasonable attempts to trade prior to locking or crossing the market during normal business hours, and there was no evidence that the traders attempted, during normal business hours, to contact and transact with other market makers whose quotes they locked or crossed. On March 17, the markets for three securities opened locked, and one opened crossed and on October 20, the markets in five securities opened locked. The NAC did not review the MRC's dismissal of the complaint's allegation that Morgan Stanley’s written supervisory procedures were inadequate to deter locked and crossed market activity.
The NAC’s decision reduced the sanctions that the MRC had ordered. The MRC had censured all respondents; fined Morgan Stanley $1 million individually; fined Slaine $100,000 jointly and severally with the firm and suspended him in all capacities for 90 calendar days; fined each of the other respondents $25,000, jointly and severally with the firm, and suspended them in all capacities for a period of 30 business days; and assessed all respondents hearing costs. The MRC imposed sanctions on the firm for manipulation, but not for the violation of NASD Marketplace Rule 4613(e). Instead, the MRC treated that violation as an aggravating factor with respect to the manipulation. The NAC imposed sanctions against Morgan Stanley of a censure and a fine of $450,000 for the manipulation and $45,000 for the locked and crossed markets, and imposed a fine of $2,500 against each of the six traders – David Robert Slaine, Thomas Anthony Crocamo, Carl DeFelice, Joseph Louis Ferrarese, Peter William Ferriso, Jr., and Charles McMichael Simonds. The NAC also ordered Morgan Stanley to pay the costs of the MRC hearing.
Both Morgan Stanley and the traders may appeal the NAC’s decision to the Securities and Exchange Commission within 30 days of the date of the decision.
NASD Regulation’s National Adjudicatory Council is currently comprised of 12 members, six from the securities industry and six who are non-industry members.
NASD Regulation oversees all U.S. stockbrokers and brokerage firms with public customers. NASD Regulation and The Nasdaq Stock Market are subsidiaries of the National Association of Securities Dealers, Inc. (NASD®) the largest securities-industry self-regulatory organization in the United States.