Morgan Stanley & Co. LLC is paying US$249 million to settle allegations that it routinely leaked confidential information about pending block trades, in an effort to curb its own market risk and secure more trading business.
The U.S. Securities and Exchange Commission (SEC) and the U.S. Attorney’s Office for the Southern District of New York both filed charges against the firm and the former head of its equity syndicate desk, Pawan Passi, alleging that Passi leaked information about clients’ block trades to certain buy-side traders who would then use that information “to ‘pre-position’ by taking a significant short position in the stock that was the subject of the upcoming block trade.”
According to the SEC’s orders, “if Morgan Stanley eventually purchased the block trade, the buy-side investors would then request and receive allocations from the block trade from Morgan Stanley to cover their short positions. This pre-positioning reduced Morgan Stanley’s risk in purchasing block trades.”
By engaging in this conduct, the regulator alleged that Morgan Stanley failed to enforce its own policies on the misuse of material confidential information.
“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 $100 million in illicit profits,” said Gurbir Grewal, director of the SEC’s enforcement division, in a release.
“When market participants game the system for personal gain in this way, it erodes investor confidence and undermines market integrity,” he said. “Today’s fraud charges underscore our commitment to holding wrongdoers accountable, no matter how complicated the fraud or sophisticated the perpetrators.”
To settle the allegations, Morgan Stanley agreed to pay approximately US$138 million in disgorgement, US$28 million in prejudgment interest and an US$83-million civil penalty.
Passi was also ordered to pay a US$250,000 civil penalty.
In a parallel action, the U.S. Attorney’s Office for the SDNY entered a non-prosecution agreement with the firm, ordering it to pay US$136.5 million in forfeiture and restitution, which was deemed to partially satisfy the SEC’s sanctions. It also agreed to a US$16.9-million fine with the SDNY.
According to the attorney’s office, the settlement reflects the firm’s “extraordinary cooperation” with the investigation, controls applied in good faith, and 2022 implementation of a series of remedial measures to address the control of confidential block trade information.
Passi also entered a deferred prosecution agreement with the SDNY.