U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20403 / December 18, 2007
Securities and Exchange Commission v. Darryl A. Goldstein and Christopher L. O'Donnell, Civil Action No. 07 CV 11275 JGK (S.D.N.Y.)
SEC Sues Two Former Morgan Stanley Financial Advisors for Deceptive Market Timing Activity; Morgan Stanley Consents to $17 Million Settlement in Related Administrative Proceeding
On December 14, 2007, the Securities and Exchange Commission (the Commission) filed a civil fraud action in the United States District Court for the Southern District of New York (S.D.N.Y.) against two former Morgan Stanley DW, Inc. (MSDW) financial advisors, Darryl A. Goldstein and Christopher O'Donnell, for allegedly engaging in a fraudulent market timing scheme. "Market timing" refers to the practice of short term buying, selling, and exchanging of mutual fund shares in order to exploit inefficiencies in mutual fund pricing.
The Commission's Complaint alleges that Goldstein and O'Donnell engaged in a number of deceptive practices to defraud at least 50 mutual fund companies and their shareholders by circumventing the funds' restrictions on market-timing. The conduct alleged occurred from on or about January 2002 until August 2003 and generated approximately $1 million in net commissions or asset-based fees for the defendants. The Complaint further alleges that, in response to market-timing trades by Goldstein and O'Donnell for their hedge fund customers, mutual fund companies sent MSDW at least 225 "block letters" that barred or restricted trading by Goldstein, O'Donnell, or their customers.
The Commission's Complaint specifically alleges that Goldstein and O'Donnell, in an effort to circumvent mutual funds' market-timing restrictions and conceal their hedge fund customers' ongoing market-timing trading, repeatedly and systematically employed a variety of deceptive practices including, but not limited to, opening and trading in multiple brokerage accounts, trading using different financial advisor identification numbers, and trading through variable annuity contracts.
The Commission's Complaint alleges that the Defendants used 11 different FA identification numbers, opened approximately 122 brokerage accounts and 64 variable annuity contracts, and placed more than 4,000 market-timing trades totaling over $4.8 billion in trading volume, in less than two years for only two hedge fund customers. The Complaint alleges that by engaging in the fraudulent market-timing scheme, Goldstein and O'Donnell violated Section 17(a) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Exchange Act Rule 10b-5.
In a related administrative proceeding, Morgan Stanley & Co. Incorporated (MS&Co.), as successor to MSDW, consented to the issuance of a Commission order which found that MSDW failed reasonably to supervise four financial advisors with a view to preventing and detecting their violations of the federal securities laws who engaged in the fraudulent market timing scheme within the meaning of Section 15(b)(4) of the Exchange Act and willfully violated Rule 22c-1(a) under the Investment Company Act of 1940 by allowing multiple mutual fund trades to be placed or amended after the 4:00 p.m. ET close of trading but priced at the net asset value determined at the market close. The order also found that MSDW violated Section 17(a)(1) of the Exchange Act and Exchange Act Rule 17a-3 by failing to make and keep records of customer orders placed after the market close and orders placed for certain hedge fund customers in variable annuity sub-accounts. Without admitting or denying the findings contained in the Commission's order, MS&Co. consented to a censure and an order to pay disgorgement, including prejudgment interest, of $5,120,000 and a penalty of $11,880,000, for a total of $17 million.
In another related administrative proceeding, Marc H. Plotkin, a former MSDW financial advisor who worked with Goldstein, consented to the issuance of a Commission order which found that Plotkin willfully aided and abetted and caused violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5 and ordered Plotkin to cease and desist from committing or causing any violations and any future violations of those statutory Sections and Rule. Without admitting or denying the findings contained in the Commission's order, Plotkin consented to an order to pay a civil penalty of $90,000 and to be barred from association with any broker, dealer, or investment adviser with the right to reapply for association after one year and prohibited him from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor or principal underwriter with the right to reapply for association after one year.