The U.S. Securities and Exchange Commission (SEC) has charged Morgan Stanley & Co. LLC and its former equity syndicate desk head, Pawan Passi, with engaging in fraudulent activities related to block trade transactions. The case involves the misuse of confidential information, with Morgan Stanley also facing charges for failing to enforce internal policies against such misconduct.
According to the SEC, from June 2018 to August 2021, Passi and a subordinate leaked non-public information about impending block trades to certain investors. These investors would then take short positions in anticipation of these trades, reducing Morgan Stanley’s risk when purchasing the block trades. This practice was in direct violation of the confidentiality assured to selling shareholders and Morgan Stanley’s own regulations.
“Sellers entrusted Morgan Stanley and Passi with material non-public information concerning upcoming block trades with the full expectation and understanding that they would keep it confidential,” commented SEC Chair Gary Gensler. “Instead, Morgan Stanley and Passi abused that trust by leaking that same information and using it to position themselves ahead of those trades. While their conduct may have earned them tens of millions of dollars on low-risk trades, it violated the federal securities laws. Thanks to the hard work of the SEC staff, they are being held accountable.”
Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, added: “Despite assuring selling shareholders that they would keep their efforts to sell large blocks of stock confidential, Morgan Stanley and Pawan Passi instead leaked that material non-public information to mitigate their own risk, win more block trade business, and generate over a hundred million dollars in illicit profits. When market participants game the system for personal gain in this way, it erodes investor confidence and undermines market integrity. Today’s fraud charges underscore our commitment to holding wrongdoers accountable, no matter how complicated the fraud or sophisticated the perpetrators.”
Furthermore, the SEC discovered Morgan Stanley’s failure to maintain effective information barriers, allowing material non-public information to be shared between its private equity syndicate desk and a public trading division, potentially influencing trades.
As a result of these violations, Morgan Stanley faces an order to pay more than $249 million to settle the charges, including approximately $138 million in disgorgement, around $28 million in prejudgment interest, and an $83 million civil penalty for willfully violating the Securities Exchange Act of 1934. Additionally, Passi is ordered to pay a $250,000 civil penalty and faces several professional bars.
Commenting on the case, Matt Smith, CEO of surveillance solutions vendor Steeleye, said: “Today’s Morgan Stanley fine underscores how any block trade is extremely sensitive to information leakage to a third party. The trouble is that block trades not yet publicly disclosed are considered material non-public information, which is why the SEC view the sharing of such information as market manipulation since the recipient can potentially ‘front run’ the block trade to trade favourably on their own account. With the spread of insider information much harder to control for block trades, proper supervision of information flow prior to any block trading activity is crucial and this needs to be linked to any corresponding market shifts.”
In a related development, the U.S. Attorney’s Office for the Southern District of New York announced criminal resolutions with Morgan Stanley and Passi, with Morgan Stanley’s forfeiture and restitution in the criminal case partially offsetting the SEC’s ordered payments.
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