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Morgan Stanley Stock Tumbles on Wealth Unit Probe; Put Contracts Surge 180%

Morgan Stanley - ★★★★ - Ranked #25 in our Q2 2024 Large Cap Equity Rankings

Shares of Morgan Stanley (MS) plummeted by 5.25% on Thursday, as the financial services giant's wealth management division came under intense regulatory scrutiny. Multiple federal agencies, including the Securities and Exchange Commission (SEC) and the Office of the Comptroller of the Currency, are reportedly investigating the company's client onboarding process and anti-money laundering (AML) practices.

Regulatory Probe into Wealth Management Unit:

According to people familiar with the matter, regulators are probing how Morgan Stanley vets clients who may pose a risk of money laundering through the bank's expansive wealth management division. The investigation involves the SEC, the Treasury Department, and the Federal Reserve, which had previously reported that supervisory action was under consideration.

The main concerns center around whether Morgan Stanley has been conducting sufficient due diligence on the identities and sources of wealth of prospective clients, as well as the ongoing monitoring of financial activity within the wealth management unit, particularly with regard to international clients.

Options Traders Capitalize on the Sell-off:

As the news of the regulatory investigation unfolded, options traders appeared to have capitalized on the stock's decline. The April 19 2024 expiration $90 strike price put contract on Morgan Stanley saw a remarkable 180% increase in value during the trading session.

This surge in options activity suggests that some market participants had hedged or anticipated the sell-off in Morgan Stanley's stock and captured a sizeable one day return from the downside move through options trading strategies.

Morgan Stanley's Response and Outlook:

Morgan Stanley has acknowledged the regulatory scrutiny and has been working to address the issues raised by the authorities. In a recent interview, the company's former CEO and current executive chairman, James Gorman, stated that the bank is investing in compliance, technology, and artificial intelligence to better understand the flow of money tied to its wealth management business.

The outcome of the ongoing investigations and their potential impact on Morgan Stanley's operations and financial performance will be closely watched by investors and analysts in the coming months. The stock's sharp decline on Thursday highlights the market's concern over the regulatory issues facing the company's wealth management unit.

The Wall Street Journal was first to report the pending investigations.

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