The government's stock market watchdog has recommended to the Financial Services Agency that Morgan Stanley Japan Ltd. and two Morgan Stanley traders be punished for illegal stock deals involving short-selling.
The Securities and Exchange Surveillance Commission said Wednesday the brokerage and traders violated the Securities and Exchange Law by intentionally engaging in deals to drive down the stock price of a company to a level that did not mirror its financial fundamentals.
The SESC said a Morgan Stanley trader on Dec. 4 last year arranged for another Morgan trader to sell 5,000 spot shares in five installations on the Osaka Securities Exchange to bring the share price down to 61 yen.
The trader made the arrangement because he could not sell the company's shares short at 67 yen in the nine-minute period from 3:03 p.m. after telling the bourse he was about to begin short-selling, SESC officials said, adding the trader ran into difficulties in selling the stock at 67 yen, as other players offered to buy it at 66 yen or less, leading the trader to seek another Morgan trader's collaboration.
Before these transactions, Morgan had sold short 3 million shares at around 2:45 p.m. on the bourse without confirming beforehand whether it could borrow that large a number of shares from other financial firms.
When Morgan subsequently contacted other financial firms to ask them to lend the shares so it could meet the short sales contracts it had concluded, it turned out the firms did not have enough shares to lend, they said.
As a result, Morgan ended up violating short-sales regulations concerning a 1.7 million-share portion of the 3 million shares it had sold short, they said.
Morgan violated regulations governing the appropriate price with regard to 1 million of the shares, they said.