The Financial Services Authority (FSA) has today fined Morgan Stanley & Co International Plc (Morgan Stanley) £1.4 million for systems and controls failings in relation to trader mis-marking which led the firm to make a $120 million negative adjustment in June 2008.
The FSA has also banned Matthew Sebastian Piper, a former proprietary trader at the firm, from performing any function in relation to any regulated activity on the grounds that he is not a fit and proper person. Piper was also fined £105,000.
In breach of FSA Principles, the firm failed to effectively use the controls it had in place for dealing in illiquid financial products. It failed to ensure adequate supervision of Piper's books and as a result, did not price certain positions accurately. Further, the firm failed to prevent or detect the mis-marking in a timely manner.
The firm further failed to respond quickly enough to changing conditions in the credit markets (namely an increase in volatility and a decrease in liquidity) by making adjustments to its existing systems and controls which would have enabled it to detect the mis-marking of the illiquid products in a timely manner.
Piper deliberately mis-marked the positions he traded on behalf of Morgan Stanley and sought to hide losses by manipulating the processes the firm had in place to monitor trading activity.
Margaret Cole, FSA director of enforcement, said: "Market confidence is likely to be damaged by sudden and unexpected write downs and revaluations of securities. Firms must take care to ensure their traders operate within a proper control environment. Financial instruments must be priced correctly by traders, particularly in more challenging conditions and when it comes to illiquid products.
"Piper has been banned because his misconduct was deliberate, frequent and repeated over a six-month period. He was a senior and experienced trader who held a position of trust at the firm. This was clearly a serious breach of the standards of behaviour we expect of approved persons.
"Firms must take care to allocate sufficient resources to supervise adequately those activities that they choose to undertake. Where a firm fails to act accordingly the FSA will take action against the firm."
Morgan Stanley cooperated fully with the FSA and agreed to settle at an early stage of the FSA's investigation. The firm qualified for a Stage 1 discount under the FSA's settlement discount scheme. Without the discount the fine would have been £2 million.
The FSA took into account Piper's early admission of misconduct and his cooperation with both the FSA and Morgan Stanley. He agreed to settle early and also qualified for a 30% reduction to his fine. Without the discount the fine would have been £150,000.
On discovery of the mis-marking, the firm suspended Piper and senior management commissioned a review into the marking of his positions. The review identified serious weaknesses in the implementation, operation and management of Morgan Stanley's systems and controls.