Morgan Stanley admits to reporting lapses

Morgan Stanley misled investors over the scale of its short positions for more than six years, according to the US Financial Industry Regulatory Authority, which has extracted its biggest ever penalty for this type of violation.

Finra said on Wednesday that the bank had agreed to pay $2m and submit to a toughening of its internal processes, after it admitted lapses in its aggregating of short positions - bets that a company's stock will fall - across its various business units.

The lapses affected "billions" of shares, and meant that investors were unable to get an accurate sense of the market's sentiment towards certain stocks and of the cost of putting on short trades, said Thomas Gira, executive vice-president of market regulation at Finra.

"There was no bias to under- or over-report, but their supervisory system had flaws in it. Over time, if you don't realise those flaws, the numbers can get pretty large," he said.

In a statement, Morgan Stanley said that it had "co-operated fully with Finra's investigation, self-reported many of the issues raised in the settlement, and . . . revised its short-interest reporting policies, procedures and internal controls to address these issues."

The fine is the largest levied for this type of violation by Finra, an independent, not-for-profit organisation funded by the firms it regulates. Last year it brought 1,397 disciplinary actions against registered brokers and other firms, which paid a total of $134m in fines.

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Goldman Sachs was hit by the next biggest fine, ordered to pay $22m in 2012 for failing to guard against the dissemination of price-sensitive information during so-called "huddles" between analysts and traders.

Finra said it found no evidence that Morgan Stanley's misreporting was deliberate, or benefited any of the broker's own trading positions. But it ran counter to Regulation SHO, the Securities and Exchange Commission rule which requires broker-dealers to aggregate their positions in any given stock to determine if they are long or short.

Finra found that over a long period, Morgan Stanley included positions from the accounts of affiliates not connected to the broker-dealer when determining each of its units' net position. As a result of one coding error running for 17 months until November 2013, the bank over-reported positions by including 492 short positions totalling more than 2.2bn shares, when it should have reported 69 positions totalling 2.9m shares.

"It's not a pretty document," said Mr Gira, of the sanctions letter. "They were just getting a lot of things wrong."

This was not Morgan Stanley's first lapse in this area. In May 2011 it was fined for a similar offence, paying $30,000 for short-interest reporting violations between April and October 2007.

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