SEC Fines Morgan Stanley $5 Million Over Short Sale Violations in Swaps Business

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The Securities and Exchange Commission censured and fined Morgan Stanley & Co $5 million for violations of Exchange Act Regulation SHO's order marking requirements: namely that the firm failed to properly mark all sales of equity securities as "long," "short," or "short exempt."

A short sale is a transaction in which the seller does not actually own the stock that is being sold (a "long" sale involves a position the seller actually owns) but instead borrows assets/stocks/etc from the entity through which the seller is placing the sell order. For broker-dealers like Morgan Stanley, short sales usually utilize banks and fund management companies as borrowers while for investors, a broker-dealer may also serve as a lender.

Because long and short sales coincide with several different rules and regulations, including short-specific restrictions, investors may be put at risk if a broker mismarks a transaction as "long" when it was really "short" (e.g., claiming to own a position the seller doesn't actually own): Short selling has many risks that long selling does not, such as increased exposure to losses or making use of margin.

The SEC said that Morgan Stanley, "for many years," has mismarked orders across "countless transactions."

In 2014, FINRA fined Merrill Lynch $6 million for short sale violations and related supervisory failures while in 2018, the SEC announced a $4 million settlement with Wells Fargo Advisors over unsuitable short-selling strategy recommendations to investors.

As part of that settlement, Wells Fargo agreed to return $930,377 to customers who were harmed as a result of unsuitable short sales and market-linked investments (MLI) swaps.

If you have invested with Morgan Stanley, Merrill Lynch, Wells Fargo, or with any brokerage or investment adviser who unsuitably recommended a risky trading strategy, such as short selling or investing on margin, in contravention of your more conservative investment preferences and risk tolerance levels, resulting in losses or other harm to your investments or interests, please call an experienced FINRA arbitration attorney at The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.