Morgan Stanley settles case related to First Republic founder’s transactions

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Morgan Stanley is paying $2 million to settle allegations that it failed to ensure that trades it made for a former First Republic Bank executive in the run-up to the bank’s collapse last year were not based on insider information privileged.

The settlement, which is with Massachusetts state securities regulators, was announced Friday morning.

It does not name the bank’s former director or accuse anyone of insider trading. But the share sales detailed in the settlement match those of First Republic founder and former executive chairman James Herbert II, who sold more than $6.8 million in shares in February and March of last year, before the bank’s stock plunged , which were finally complete. destroyed when the bank collapsed.

Herbert and other First Republic executives sold more than $10 million worth of stock in the early months of 2023 before the bank failed, rendering the bank’s stock worthless. First Republic was later sold to JPMorgan Chase in a deal that was brokered by the Federal Deposit Insurance Commission.

No charges were brought against Herbert or other bank executives related to the stock sales. The Securities and Exchange Commission and the Justice Department, both of which police illegal insider trading, did not return requests for comment. A spokesman for Herbert declined to comment.

Herbert and other former First Republic executives have been named in a class-action lawsuit alleging, among other things, that they traded inside information as the bank was going bankrupt.

Massachusetts’ securities regulator, which is led by its secretary of state, William Gavin, says Morgan Stanley ran through numerous red flags that should have triggered further review before completing the deals. Brokers are required to maintain reasonable controls to prevent trading in shares that may be unlawfully based on inside information.

The settlement describes Morgan Stanley’s fraud detection team, which the settlement says lacked the skills to conduct basic Internet searches, as woefully inadequate.

Morgan Stanley did not admit or deny wrongdoing in the settlement, but along with paying the fine, it agreed to review and improve its monitoring practices. A spokeswoman for Morgan Stanley said the firm was “pleased to have resolved the matter”.

It is the first major settlement with a regulator to emerge from last year’s regional banking turmoil, which led to three bank failures and tens of billions of dollars in losses for the Federal Deposit Insurance Fund.

Critics have said that securities regulators have routinely done an inadequate job of policing insider trading by corporate executives. In late 2022, the SEC tightened the rules governing the plans, called 10b5-1, which allow executives to buy and sell their company’s stock without being scrutinized from acting on insider information.

Directors, however, are allowed to buy and sell stock in their own companies outside of 10b5-1 accounts, as long as they are not acting on insider information. Share sales by a number of executives and lawmakers in the run-up to last year’s regional banking crisis have raised concerns that more needs to be done to curb insider trading.