Leading US multinational bank Morgan Stanley has agreed to a settlement with the US Securities and Exchange Commission (SEC) over a case of alleged ‘multi-year fraud’.
The federal independent agency, which is the primary regulator of stock trading with a chief remit for countering market manipulation, has been conducting an extensive investigation of the bank and specifically the former Head of its Equity Syndicate Desk, Pawan Passi.
Passi is accused of disclosing confidential information relating to the sale of large quantities of stock known as ‘block trades’, which are privately arranged sales executed outside of the usual public markets.
“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,” said 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.”
Regarding Passi’s actions, the SEC investigation found that the former equity trader, along with a subordinate, disclosed non-public, potentially market-moving information concerning block trades to ‘select buy-side investors’ in the face of confidentiality requests, between 2018 and August 2021.
The information was subsequently disclosed on the understanding that buy-side investors would ‘pre-position’ by taking a short position in the stock. If Morgan Stanley purchased the block trade, these investors would request and receive allocations covering their short positions, also reducing the bank’s risk.
Although largely the actions of the individuals themselves, the SEC determined that Morgan Stanley had failed to enforce information barrier requirements and had been unable to scrutinise trades on equity securities to a sufficient level.
The bank has been ordered to pay penalties totalling $249m, spread across $138m in disgorgement, around $28m in prejudgement interest and an £83m civil penalty. Passi, meanwhile, has been ordered to pay $250,000 and has also been hit with associational, penny stock and supervisory bans.
Gurbir S Grewal, Director of the SEC’s Division of Enforcement, said: “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.”
The enforcement action comes five months after Morgan Stanley found itself in regulatory hot water in the UK, being charged £5.41m by Ofgem, the country’s national energy regulator.