Morgan Stanley Unit Fined Over Trader’s $1.3 Billion Bet

Morgan Stanley (MS) Smith Barney, the brokerage venture of Morgan Stanley and Citigroup Inc. (C), was fined $450,000 after a trader amassed a $1.3 billion bet in 2009, Financial Industry Regulatory Authority records show.

The brokerage didn’t have enough controls in place to detect that Jared Weinryt, 31, had breached his $116 million trading limit as he made overnight bets on futures, Finra said this month. The trades led to losses for Morgan Stanley Smith Barney of about $14.9 million, according to Finra.

Regulators are pressing Wall Street to heighten risk controls after multibillion-dollar trading losses at UBS AG and JPMorgan Chase & Co. (JPM), the collapse of MF Global Holdings Ltd. (MFGLQ) after a $6.3 billion bet on European debt, and Knight Capital Group Inc. (KCG)’s $270 million loss caused by faulty software.

Morgan Stanley Smith Barney “detected the trading activity by a former employee that occurred three years ago, stopped it promptly, reported it to regulators, and has since added new controls designed to prevent a reoccurrence,” Christine Jockle, a spokeswoman for the unit, said in an e-mailed statement.

The brokerage employed Weinryt from 2006 to 2009, Finra records show. He bought and sold futures, agreements to trade assets at set prices and dates. Investors sometimes buy futures as a bet on price fluctuations and sell them before the delivery date. Weinryt traded in futures tied to U.S. sovereign debt and Eurodollars, according to Finra.

Market Turned

Weinryt’s futures bets totaled about $744 million at the end of the trading day on July 14, 2009, exceeding his $116 million limit, according to a document posted on Finra’s website. His bets swelled to about $1.33 billion as he continued trading overnight, the document shows.

The market turned against Weinryt the next morning and he tried to reduce the bets, incurring losses, according to Finra. The brokerage cut off Weinryt’s access to the trading system in late morning on July 15 and liquidated the contracts by the next day. Total losses were $14.9 million, Finra said.

The industry regulator suspended Weinryt from trading for two months and fined him $7,500 earlier this year, records show. He consented to the sanctions without admitting or denying the findings, according to Finra. Weinryt declined to comment.

He now works in the institutional fixed-income sales division of Palm Beach Gardens, Florida-based Kiley Partners Inc., which trades securities including municipal bonds, U.S. government bonds and corporate debt.

“We were delighted to have an opportunity to employ a smart and talented employee like Jared Weinryt,” Chief Executive Officer Michael Kiley said yesterday in a phone interview. He “does a great job for us and his clients.”

Morgan Stanley owns 51 percent of the Smith Barney brokerage, which has more than 17,000 advisers and $1.74 trillion in client assets. Citigroup, the third-largest U.S. lender, owns the rest and is in the process of selling an additional 14 percent stake to Morgan Stanley. Both banks are based in New York.

To contact the reporters on this story: Laura Marcinek in New York at lmarcinek3@bloomberg.net; Donal Griffin in New York at dgriffin10@bloomberg.net.

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.

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