In the weeks before his bank collapsed last year, exacerbating the largest banking crisis in a generation, First Republic’s chief executive, James Herbert, was busy selling millions of dollars’ worth of his shares in the company.
The sales, which netted the executive and his family nearly $7 million over the six months that preceded First Republic’s demise, were waved through by Mr. Herbert’s personal bankers at Morgan Stanley without their passing any judgment on whether he was trading on insider information, according to a settlement with Massachusetts securities regulators released on Friday.
The trades helped Mr. Herbert avoid a “complete loss,” the settlement said, when First Republic was deemed insolvent and seized by regulators in May 2023.
As is customary in such cases, Morgan Stanley did not admit or deny wrongdoing, though it will pay $2 million in fines to the State of Massachusetts, where regulators have been active policing financial services firms. The settlement did not name Mr. Herbert but described the seller of the shares as a “former chief executive and insider” of First Republic. A spokesman for Mr. Herbert declined to comment.
A spokeswoman for Morgan Stanley said the bank was “pleased” to have resolved the matter. Most of First Republic has since been absorbed by JPMorgan Chase.
The unraveling of First Republic shocked many because Mr. Herbert, who founded the bank in 1985, had built it into one of the more admired lenders in the industry by catering to wealthy savers and start-up companies.
His actions have since come under scrutiny. As the bank’s customers were pulling out their funds, the CNBC host Jim Cramer reported that Mr. Herbert had assured him that the bank was doing “business as usual,” and that there were “not any sizable number of people wanting their money” back.
Morgan Stanley’s actions had mostly evaded attention, but the settlement this week shows that the bank’s employees did not take even basic steps to ensure that Mr. Herbert’s trading was permissible. In one instance, a Morgan Stanley “monitoring officer” mistakenly concluded that there was no connection between First Republic and Mr. Herbert.
“As a compliance supervisor later testified, a straightforward internet search would have revealed the connection,” the settlement said.
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