The US Securities and Exchange Commission (SEC) has charged investment banking firm Morgan Stanley and the former head of its equity syndicate desk Pawan Passi over fraud in block trading business.
Morgan Stanley has agreed to pay over $249m to settle the multi-year fraud charges and for failing to enforce information barriers.
The US SEC has also charged Morgan Stanley with failing to comply with its policies pertaining to the misuse of material non-public information related to block trades.
According to the SEC’s orders, Passi and a subordinate on Morgan Stanley’s equity syndicate desk disclosed non-public, possibly market-moving information concerning impending block trades to select buy-side investors.
This took place from at least June 2018 through August 2021, despite the confidentiality requests from sellers and the own policies of Morgan Stanley about the treatment of confidential information.
Besides, the order alleges that Morgan Stanley and Passi revealed the block trade information knowing that buy-side investors would use the data to pre-position by taking a substantial short position in the stock that was the subject of the upcoming block trade.
Furthermore, the SEC orders state that if Morgan Stanley purchased the block trade, the buy-side investors would request and receive allocations from the block trade from the bank to cover their short positions.
The pre-positioning reduced Morgan Stanley’s risk in buying block trades.
The SEC’s order also found that Morgan Stanley did not implement information restrictions to prevent material non-public data involving certain block trades from being conveyed by the equity syndicate desk to a trading division on the public side of the firm.
US SEC Chair Gary Gensler said: “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.
“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.”
