I picked this off another thread. Found it to be very interesting.
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To: BlackStar (5187 )
From: grw5 Monday, Apr 13 1998 7:32PM ET
Reply # of 5191
<OFF TOPIC but a great article>
(BW)(NASD-REGULATION) NASD Regulation Sanctions Morgan Stanley and Seven
Traders
Business Editors
WASHINGTON, D.C.--(BUSINESS WIRE)--April 13, 1998--NASD Regulation,
Inc., today issued a decision by its Market Regulation Committee that
fined Morgan Stanley & Co., Inc., $1 million for manipulating the price
of 10 securities that underly the Nasdaq 100 Index (NDX) on two separate
"expiration Fridays" in 1995. The NDX options expire on the third Friday
of every month.
Seven Morgan Stanley traders, including the firm's then- OTC Desk Head
Trader, were sanctioned. David Slaine, the former head of OTC trading at
Morgan Stanley, was suspended from the brokerage industry for 90 days
and fined $100,000. The six other traders - Thomas Anthony Crocamo, Carl
DeFelice, Joseph Louis Ferrarese, Peter William Ferriso, Jr., Robert
Scott Ranzman, and Charles McMichael Simonds - were each suspended for
30 days and fined $25,000. Morgan Stanley is jointly and severally
liable for the traders' fines.
After a five-day hearing before a panel of industry members, the Market
Regulation Committee found that Morgan Stanley, in order to ensure that
the firm's Program Trading Desk did not suffer a loss when its 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. 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.
The initial complaint against Morgan Stanley and the seven individuals
in this case was issued by NASD Regulation on October 25, 1996. This
case, which began with complaints about locked and crossed markets from
other market makers, was uncovered after a lengthy investigation by the
Market Regulation Department. A locked market occurs when the bid price
equals the sell price in the same security, and a crossed market occurs
when the bid price is greater than the sell price of a security.
The Committee found that, in connection with this arrangement, on March
17, 1995 and October 20, 1995, Morgan Stanley's OTC Desk improperly and
fraudulently raised the price at which it would buy the securities in
the open market, moving the market for each security - and the opening
print price in that security - higher. The firm raised its bid without
purchasing any stock in an effort to make Friday's opening print price
equal to or exceed Thursday's closing sell price. The Committee found
that Morgan Stanley's OTC Desk assumed the risk for more than $300
million of the firm's capital as a result of the intra- firm
transaction, thereby enabling the Program Trading Desk to cover its
short position at a price (in this case, the opening print price) that
would prevent substantial losses, and enable the OTC Desk later to cover
the short position at a profit, or at least to break even.
Morgan Stanley was able to manipulate the price of the NDX because, as a
capitalization-weighted index, 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.
The Committee found that the prices of five 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 10 securities, before
the market opened, creating the last new inside bid price prior to the
opening. Generally, raising the bid price prior to the opening on
expiration Friday does not attract many sellers because market makers
are reluctant to trade prior to the opening. Morgan Stanley was the
first market maker to decrease its bid for every one of the 10
securities within minutes after the market opened, and in some instances
without buying any stock at all.
Locked and crossed markets resulted from this manipulative bidding
activity. 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 to contact and
transact with other market makers whose quotes they locked or crossed.
On March 17, the markets for three of the five securities opened locked,
and one opened crossed; and on October 20 the markets in all five opened
locked. The Committee found this activity to be an element of the
manipulative scheme as well as violative of the NASD Rule governing
locked and crossed markets, but did not conclude that Morgan Stanley's
written supervisory procedures were inadequate to deter locked and
crossed market activity.
The Committee also noted took notice that Morgan Stanley engaged in a
similar pattern of pre-opening quoting activity in 67 other Nasdaq
National Market securities underlying the NDX on those two expiration
Fridays. In these examples, the firm increased its bids in pre-opening
trading, did not purchase any stock prior to the opening, and decreased
the price within minutes after the shares were transferred to the
Program Trading Desk.
NASD Regulation found no evidence that any of the companies whose
securities were involved in this case were aware of what was happening.
Initial actions, such as this, by NASD Regulation disciplinary
committees are final after 45 days, unless they are appealed to NASD
Regulation's National Adjudicatory Council (NAC), or called for review
by the NAC. The sanctions are not effective during this period. If the
decision in this case is appealed or called for review, the findings may
be increased, decreased, modified, or reversed.
NASD Regulation's Market Regulation Committee is currently comprised of
13 members, six from the securities industry and seven who are
non-industry members. All members serve three-year terms.
NASD Regulation oversees all U.S. stockbrokers and brokerage firms. NASD
Regulation, and The Nasdaq Stock Market, Inc., are subsidiaries of the
National Association of Securities Dealers, Inc. (NASD(R)), the largest
securities- industry self-regulatory organization in the United States.
For more information on NASD Regulation, visit the Web Site
(www.nasdr.com).
Thanks to KAA on the CVIA thread for digging it up. |
