The Securities and Exchange Commission (SEC) has charged Morgan Stanley and Pawan Passi, former head of its equity syndicate desk, with multi-year fraud linked to block trades.
The SEC found that Morgan Stanley and Passi disclosed confidential information about the sale of large quantities of stock as well as failure 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,” said Gary Gensler, SEC chair.
“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.”
The SEC’s orders show that from at least June 2018 until August 2021, Passi and a subordinate on Morgan Stanley’s equity syndicate desk disclosed non-public information related to impending block trades, that were potentially market moving, to select buy-side investors despite the sellers’ confidentiality requests as well as the firm’s own policies regarding the treatment of confidential information.
Morgan Stanley and Passi, according to the SEC’s orders, disclosed the block trade information enabling buy-side investors to “pre-position” by taking a significant short position in the stock that was the subject of the upcoming block trade.
The SEC’s orders show that 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. According to the SEC, this pre-positioning reduced Morgan Stanley’s risk in purchasing block trades.
The SEC has ordered Morgan Stanley to pay approximately $138 million in disgorgement, approximately $28 million in prejudgment interest, and an $83 million civil penalty.
Elsewhere, Passi has been ordered by the SEC to pay a $250,000 civil penalty, and imposes associational, penny stock, and supervisory bars.
“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,” said Gurbir S. Grewal, director of the SEC’s Division of Enforcement.
“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.”