Morgan Stanley fined for First Republic CEO’s $7 million stock sales

In the weeks leading up to the collapse of First Republic Bank in May 2023, CEO James Herbert sold nearly $7 million worth of shares, a move that raised concerns about insider trading. Massachusetts regulators found that Morgan Stanley, which facilitated these transactions, failed to assess whether Herbert was trading on non-public information. The bank's compliance oversight was criticized, as a monitoring officer incorrectly determined there was no link between Herbert and First Republic, despite the obvious connection. This oversight allowed Herbert to avoid significant financial loss when the bank was deemed insolvent. The settlement reached with Massachusetts regulators resulted in Morgan Stanley agreeing to pay a $2 million fine, although the bank did not admit to any wrongdoing. The settlement described the seller of the shares as a former chief executive and insider, without naming Herbert directly. This incident has drawn attention to the practices of financial institutions in monitoring insider trading and ensuring compliance with securities regulations. Herbert, who founded First Republic in 1985, had previously built a reputation for the bank by serving affluent clients and startups. However, as customers began withdrawing their funds, he publicly assured stakeholders that the bank was stable, contradicting the reality of the situation. The fallout from the bank's collapse has led to increased scrutiny of both Herbert's actions and the role of Morgan Stanley in facilitating his stock sales. Ultimately, the case highlights the importance of regulatory oversight in the financial sector and raises questions about the effectiveness of compliance measures in preventing potential conflicts of interest and insider trading.