Morgan Stanley agrees to pay $2 million to settle lawsuit over bank stock sales

The investigation accuses Morgan Stanley of failing to ensure that the former CEO did not act on the basis of “material non-public information” when ordering the sales.

The former CEO is referred to as “Client One” in the settlement, but the Wall Street Journal, which published an article last year about $12 million in stock sales by a dozen First Republic executives in the months before the bank’s collapse, on Friday identified him as James Herbert II, the bank’s founder, longtime CEO and one-time executive chairman.

“First Republic was a bank that put depositors and investors at risk, and it should be held accountable for its insider trading,” Galvin said in a statement. “I hope this enforcement action sends a message to Massachusetts companies that may be considering doing business with those who engage in such conduct.”

The securities investigation in Galvin’s office did not charge Herbert with insider trading. A spokesman for Herbert declined to comment, the Journal reported.

Morgan Stanley has neither admitted nor denied wrongdoing.

“We are pleased to have resolved this matter,” a Morgan Stanley spokesman said.

In its press release, the Secretary of State’s office stated that Morgan Stanley’s compliance manual prohibits its agents from buying or selling securities “if they believe that their client is in possession of material nonpublic information in the course of trading.”

“However, the employees have not confirmed [Customer One] did not act on inside information and also ignored a number of red flags related to the sale of more than $6.8 million worth of First Republic stock,” the Secretary of State’s office said.

Customer One sold First Republic shares from February 2022 to March 2023, “with the last sale occurring three days before the sharp decline in First Republic’s stock price,” the Secretary of State’s office said.

Galvin’s office said Morgan Stanley was aware of Customer One’s relationship with First Republic but “removed a notation identifying it as an affiliate, resulting in the elimination of several internal compliance reviews.”

“When employees reviewed transactions, they did not conduct meaningful checks,” the Secretary of State’s office said. “When reviewing possible insider trading alerts, surveillance officials incorrectly concluded after only one minute that there was no connection between [Customer One] and First Republic.”

This relationship “could have easily been determined through a simple Internet search,” Galvin’s office said.

In addition to the $2 million fine, Morgan Stanley was required to conduct an internal review of its policies and train its broker-dealers in Massachusetts on how to prevent insider trading, the Secretary of State’s office said.

The collapse of First Republic last year was the second-largest bank failure in U.S. history. Before its collapse, First Republic had branches in Wellesley, Cambridge and Boston.

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