What is a Parking Violation
Federal legislation clarified the illegality of parking violations through the Williams Act in 1968. This legislation limits these types of holdings to 5 percent and also places limits on public tender offers. These regulations help ensure fairness in public trading.
BREAKING DOWN Parking Violation
Parking violations tend to happen as an aspect of takeovers. While some takeovers are voluntary acquisitions, some are hostile. In hostile takeovers, the target company sometimes tries to resist the acquisition. A parking violation can help the acquiring company hide their plans for the takeover, preventing the target company from resisting.
For example, Company A wishes to takeover Company B, but in order to do so, it needs to acquire a majority of Company B’s shares. Let’s say that Company A needs to purchase 5,000 shares of Company B in order to have a majority stake in the company. Say Company A doesn't have the cash on hand to purchase all of these shares at once, or that Company B has limits in place to prevent Company A from purchasing 5,000 shares at once.
In order to secure a takeover, Company A purchases 2,000 shares of Company B and then either creates or enlists a third party, Company C to purchase another 3,000 shares of Company B. Then, when Company B is ready, it buys those 3,000 shares from Company C, giving it a majority stake in Company A. Company B’s use of Company C for this purpose is considered a parking violation.
Morgan Stanley’s Recent Parking Violation
In 2015, the Securities and Exchange Commission charged a $8.8 million fine to Morgan Stanley Investment Management for what it considered a parking violation. A Morgan Stanley portfolio manager, Sheila Huang, managed a portfolio that needed to liquidate some of its positions. Huang then arranged the sales of certain securities to Yimin Ge, a trader for SG Americas at a specific price with the intention of buying those securities back later at a small markup.
The SEC condemned the practice, saying that, “Instead of playing by the rules, Huang engaged in prearranged trading schemes that benefited some clients while harming others. Morgan Stanley failed to uncover Huang’s misconduct due to its lack of supervisory oversight and failure to implement policies specifically addressing prearranged trades.”