The Securities and Exchange Commission (SEC) charged investment bank Morgan Stanley and the former head of its equity syndicate desk with fraud.
Specifically, the SEC charged Pawan Passi, the former head of its equity syndicate desk, with a multi-year fraud involving the disclosure of confidential information about the sale of large quantities of stock known as “block trades.” Further, the SEC charged Morgan Stanley with failing to enforce its policies concerning the misuse of material non-public information related to block trades.
“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,” SEC Chair Gary Gensler said. “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.”
A block trade involves the sale of a large quantity of shares of an issuer’s stock, privately arranged and executed outside of the public markets. From at least June 2018 through August 2021, according to the SEC, Passi and a subordinate on Morgan Stanley’s equity syndicate desk disclosed non-public, potentially market-moving information concerning impending block trades to select buy-side investors. They did this despite the sellers’ confidentiality requests and Morgan Stanley’s own policies regarding the treatment of confidential information.
The SEC’s orders charged that Morgan Stanley and Passi disclosed the block trade information with the understanding that those buy-side investors would use the information to “pre-position” by taking a significant short position in the stock that was the subject of the upcoming block trade. Further, according to the SEC 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. Thus, this pre-positioning reduced Morgan Stanley’s risk in purchasing block trades.
“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,” Gurbir Grewal, director of the SEC’s Division of Enforcement, said. “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.”
Also, the order finds that Morgan Stanley failed to enforce information barriers to prevent material non-public information involving certain block trades from being conveyed by the equity syndicate desk to a trading division on the public side of the firm. As a result, the firm was unable to sufficiently scrutinize whether trades by that division were based on such confidential discussions.
In its order, the SEC censured Morgan Stanley and ordered it to pay approximately $138 million in disgorgement, approximately $28 million in prejudgment interest, and an $83 million civil penalty.
Regarding Passi, the SEC found that he willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 and ordered him to pay a $250,000 civil penalty. It also imposed associational, penny stock, and supervisory bars.