Morgan Stanley to pay $6.1 million for overcharges

WASHINGTON -- Morgan Stanley ms is paying $6.1 million in a settlement with securities regulators who accused the investment firm of overcharging retail brokerage customers on bond sales in 2001, it was announced Thursday.

The action involves some $3.9 million in overcharges on $59 million in corporate bond sales, the announcement said.

The Financial Industry Regulatory Authority, known as FINRA, also levied a $40,000 civil fine on the Morgan Stanley corporate bond trader said to be responsible for setting the prices, Kenneth Carberry. Carberry was also suspended for 15 business days.

Morgan Stanley was fined $1.5 million and ordered to pay $4.6 million in restitution to customers who paid markups as high as 18% for bonds issued by Kemper Lumbermens Mutual Casualty Co.

The firm and Carberry neither admitted nor denied the allegations in agreeing to the settlement with FINRA, the securities-industry regulator formed by the merger of the NASD and regulatory functions of the New York Stock Exchange, which began operations Monday.

The case, reported in Thursday's editions of The Wall Street Journal, demonstrates that it is still difficult for ordinary investors to know what they should pay for bonds, which lack the price transparency of stocks in the marketplace.

"Firms have a fundamental obligation to their customers to offer securities at prices that are fair and reasonable," said Susan Merrill, FINRA's chief of enforcement. "In this case, Morgan Stanley and its bond trader breached that obligation. ... Firms should carefully monitor the methods used by traders in setting prices to ensure that the prices paid by customers are not excessive."

FINRA alleged that from February through June of 2001, Morgan Stanley overcharged customers of its retail brokerage division in 2,807 separate sales of the Kemper Lumbermens bonds, with a total value of more than $59 million. The firm charged the customers markups — premiums over what it had paid for the bonds — ranging from 5.88% to 17.86%, according to FINRA. The markups were in addition to brokerage commissions, FINRA said.

Under securities-industry guidelines, brokerage firms' markups on corporate bonds generally should be less than 5%.

FINRA said Morgan Stanley marked up the $59 million in bonds by a total of $6.5 million, of which $3.9 million exceeded the 5% level. The firm failed to have a supervisory system in place that would have detected the excessive markups, the regulators said.