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Morgan Stanley has been ordered to pay $371,000 (including interest) in excessive markups and markdowns for corporate and municipal bond transactions.  FINRA (formerly the National Association of Securities Dealers) also fined Morgan Stanley $1 million.

The press release announcing the fine and restitution order makes clear that Morgan Stanley inadequately supervised the process of marking up or marking down municipal and corporate bond transactions.

The tone of the press release is so bland that it masks just how egregious Morgan Stanley’s conduct was in this case.  Brokerage firms often impose certain additional charges when they execute transactions.  They also provide certain discounts on markdowns. In this case, those markups or markdowns weren’t reasonable.  The press release doesn’t specifically indicate what Morgan Stanley did, but it appears that Morgan Stanley either added transaction costs of up to 13.8 percent or provided markdowns that weren’t justified by factors such as the value of the services they provided or the costs of executing the transactions.

Morgan Stanley’s conduct is particularly egregious because the investments in connection were fixed income securities.  Corporate and municipal bonds are generally considered to be more conservative investments than, for example, stocks.  Over the past several years, the annual advertised returns on such investments, before taking into account transaction costs such as sales charges, have generally been under five percent.  Thus, the markups charged by Morgan Stanley could have effectively erased years of earnings from these investments.

Finally, let’s put the amount of the fine in context. One million dollars sounds like a lot, doesn’t it? For Morgan Stanley it’s a drop in the bucket.  During the third-quarter of 2011, Morgan Stanley’s revenues from its Fixed Income and Commodities trading were $3.9 billion dollars.  That’s just for one quarter.  The quarter ending September 30, 2011 was a particularly good one for Morgan Stanley.  But even the worst circumstances, a million dollar fine isn’t going to be large enough to give Morgan Stanley an incentive to change its conduct. That’s why I continue to expect that more investors will be harmed by the giant brokerage firms.


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