THIRD EX-MORGAN STANLEY TRADER PUNISHED
By Jennifer Hughes in London 2009-05-27
A former Morgan Stanley trader has been fined £140,000 ($223,000) and banned by the City of London watchdog after he traded ahead of clients to profit from their orders. It was the third trading-related punishment linked to the bank in the past month.
Nilesh Shroff engaged in so-called “front running”, where a dealer, knowing a client’s plans, trades in the same direction before conducting the client’s order.
The Financial Services Authority said yesterday that Mr Shroff, a senior trader at the bank, “disadvantaged” clients on seven occasions between June and October 2007 by partially front running their deals.
This month, the bank paid a £1.4m fine – the 10th largest ever meted out by the regulator – for weak systems and controls that allowed a credit derivatives trader, Matthew Piper, to cover up his losses for six months. Mr Piper was himself fined £105,000 and banned.
Last week, the FSA fined and banned another former Morgan Stanley trader, David Redmond, for deliberately hiding a risky trading position from his bosses.
In the cases of Mr Redmond and Mr Shroff, the regulator said no blame was attached to the bank. Both had deliberately disobeyed rules expressly forbidding their actions. In all three cases, Morgan Stanley identified and investigated the problems and alerted the regulator itself. The traders in all three cases have been sacked by the bank.
Morgan Stanley said yesterday: “Mr Shroff deliberately and knowingly violated our policy. We took immediate action to address his misconduct, ultimately dismissing [him].”
Margaret Cole, director of enforcement at the FSA, said the punishment should serve as a warning to others who “act without honesty and integrity and who do not follow our rules”.
She added in a statement: “He was aware of FSA guidance and Morgan Stanley’s rules … but nonetheless he broke them.”
Mr Shroff’s job included “programme trades”, where a bank helps a client sell an entire portfolio or a significant chunk of one. Typically the bank will ask brokers to tender for the whole bundle of stocks.
In the example cited in the FSA’s final notice on the case, Mr Shroff knew the exact contents of a client’s portfolio and sent trades into the market in the same stocks ahead of the execution time for that client’s holdings. The deals caused 80 per cent of the prices of the stocks held in the portfolio to move against the client before its deal was done.
After a complaint from the client at the time, Morgan Stanley moved the time of the client’s trade back so it was not affected by Mr Shroff’s trades and instructed a law firm to investigate the matter. Mr Shroff was sacked for gross misconduct in December 2007.