Record fine for Morgan Stanley

BY JOHN WILLCOCK

Financial Correspondent

A record pounds 240,000 fine was yesterday imposed on the global investment bank Morgan Stanley for unauthorised trading in derivatives that cost its clients $28m (pounds 18.6m).

It is the largest financial penalty ever handed out by London's regulator of investment banks, the Securities and Futures Authority (SFA).

Five private clients suffered total losses of $28m in 1992 due to a trader who ran up massive speculative positions in the currency markets. The highly leveraged deals, one involving an open position in the lira worth $100m, came unstuck during the exchange rate mechanism crisis that year.

The record fine is a blow to Morgan Stanley's standing as a highly respected Wall Street firm. Last autumn it came close to rescuing SG Warburg, Britain's premier merchant bank, but the takeover talks came to nothing.

Morgan Stanley, whose European operations are headed by Sir David Walker, is also to pay undisclosed costs to the SFA. The joint statement by the SFA and the bank yesterday said that, following the discovery of the deals, which broke the firm's internal limits, "Morgan Stanley conducted an internal review and promptly took steps to improve its procedures".

One client who suffered losses and was subsequently compensated by Morgan Stanley was Robert Louis-Dreyfus, the former chief executive of Saatchi & Saatchi who is now chairman of Adidas, the German sports equipment group.

Publicity over the settlement between the SFA and Morgan Stanley had been delayed pending settlement of disciplinary action against Burkhard Brauch, a former vice-president of Morgan Stanley International in London.

But press reports forced the SFA to announce yesterday that Morgan Stanley had breached rules "in the manner in which it organised, conducted and supervised foreign exchange business for five private clients in 1992". The SFA said the bank had admitted it "failed to ensure that dealing on four of those accounts remained suitable for the clients and was not too frequent in the circumstances".

The bank sacked Mr Brauch at the end of 1992. He is taking legal action against it for unfair dismissal and damages. Morgan Stanley is suing Mr Brauch for $30m through the London courts.

The SFA is seeking a date for an independent tribunal to judge the disciplinary case against Mr Brauch, a German national now living in Madrid. The tribunal will be held in London and Mr Brauch's case will be heard in absentia if he is not available, an SFA source said.

In an agreed statement, the bank admitted that "contract notes were not sent to the clients in respect of foreign exchange transactions, and statements and valuations did not disclose the underlying transactions or the open positions".

"Records available to the management did not show marked to market positions and the firm did not adequately monitor the amount of margin which had to be paid by four of the clients," the SFA said.

Four of the clients have agreed to accept compensation from Morgan Stanley - some had emerged with "negative equity" on their investments following the unauthorised trading.

One client, Universal Consult (UK), refused to settle with the bank until the conclusion of the SFA's investigation. It is understood to be keen to increase its settlement with the bank.

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