Nicholas Michael Bonacci of New York New York a stockbroker formerly employed by Morgan Stanley Co. LLC is the subject of an SEC Order requiring Bonacci (1) be suspended for twelve months from associating with any broker or investment adviser (2) pay a $100,000.00 civil penalty and (3) cease and desist from committing current and future violations of Securities Exchange Act of 1934 Section 15(c)(1)(A) according to findings that Bonacci made misrepresentations to customers when trading residential mortgage backed securities. In the Matter of Nicholas M. Bonacci Administrative Proceeding File No. 3-17575 (Sept. 26, 2016).
According to the Order, Bonacci misled customers in his purchase and sale of residential mortgage-backed securities during the time that he was a trader for Morgan Stanley. Apparently, Bonacci was responsible for making trade arrangements between customers of Morgan Stanley. This meant that he would make a purchase of a residential mortgage-backed security from one customer and sell that security to another customer.
The Order revealed that the residential mortgage backed securities often contained non-transparent market prices and lacked liquidity. Particularly, the majority of residential mortgage backed securities that Morgan Stanley traded in 2012 contained substantial discounts to face value after the 2008 market crash. Evidently, some of the investors in the residential mortgage backed securities market depended on dealers to ascertain the information about the values of those securities.
The Order stated that as an intermediary, Bonacci sometimes negotiated a residential mortgage backed security from one customer, and on the same day, arranged a resale of that security to another customer. Apparently, when a potential buyer had been identified by Bonacci, the security was sold on a principal basis because of it being held in the principal account of Morgan Stanley preceding the transaction. Bonacci would commonly purchase the residential mortgage backed security from the customer and sell it at a higher price to another customer soon afterwards.
The Order stated that customers of Morgan Stanley had been misled by Bonacci concerning the price which Morgan Stanley purchased the securities. He also reportedly failed to be forthcoming to customers about the compensation that Morgan Stanley received in return for making the trade arrangements. In some cases, according to the Order, Bonacci misrepresented that he was arranging the trades between customers when he had actually been selling the securities from the inventory of Morgan Stanley.
For example, on January 11, 2012, a DBALT 2006-AR6 bond was purchased by Bonacci for Morgan Stanley, and Bonacci had plans to market the security on that day. The order stated that a $30,000,000.00 notional was purchased by Bonacci at 49-00. Fifteen minutes later, he made misrepresentations to a purchaser by claiming that a money manager had been showing him DBALT 2006-AR6 at 50; Morgan Stanley never bought the bond for that price. A couple hours later, the buyer offered Bonacci 49-08, which would have enabled Morgan Stanley to receive a quarter point spread on the transaction.
Despite Morgan Stanley being in a position to profit on the transaction, Bonacci seemingly continued to state that an active seller was involved rather than stating that Morgan Stanley owned the bond in its inventory. The buyer subsequently offered 49-20. The buyer then questioned Morgan Stanley’s amount of compensation in arranging the trade, and was told by a salesperson acting on Bonacci’s behalf that Bonacci would see if he could obtain compensation from the seller. The buyer ultimately purchased the bond at 49-20 after being told that the seller would pay Bonacci. SEC found those statements misleading; it affected the price that buyer A paid. Morgan Stanley reportedly profited in the amount of $127,500.00 from the trade – a trade based upon Bonacci’s misleading statements.
SEC stated that if customers of Morgan Stanley knew of the misrepresentations made by Bonacci, and were cognizant of the information about the securities, they would not have been inclined to pay the purchase prices quoted by Bonacci or the compensation that Morgan Stanley demanded for effecting the trade arrangements. SEC indicated that Bonacci’s misrepresentations led Morgan Stanley to accumulate unwarranted revenue, and found Bonacci to have willfully aided and abetted Morgan Stanley’s violations of Securities Exchange Act of 1934 Section 15(c)(1)(A).
Bonacci’s registration with Morgan Stanley was terminated on February 5, 2016.
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