Morgan Stanley has agreed to a $249 million settlement with the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) following accusations of deceptive practices related to block trading.
This resolution addresses allegations against both Morgan Stanley & Co. and its former principal of the equity syndicate desk, who were implicated in a prolonged deceit involving block trade disclosures.
The settlement, exceeding $249 million, is a response to charges of fraud and the firm's failure to uphold information safeguards. Additionally, Morgan Stanley has entered a nonprosecution agreement with federal prosecutors in Manhattan, effectively avoiding criminal charges. According to a January 12th SEC order, the settlement comprises roughly $138 million in disgorgement, about $28 million in prejudgment interest, and an $83 million civil fine.
Gurbir S. Grewal, the SEC's Enforcement Division Director, emphasized the significance of this action: "When market participants exploit the system for personal advantage, it diminishes investor trust and damages the integrity of markets. Today's fraud charges highlight our dedication to bringing to account those responsible, regardless of the complexity of the fraud or the sophistication of those involved."
Between June 2018 and August 2021, Pawan Passi, previously in charge of Morgan Stanley's Americas equity syndicate desk, and a subordinate, reportedly disclosed confidential, market-sensitive information about upcoming block trades to certain buy-side investors. This was in direct violation of sellers' confidentiality requests and Morgan Stanley's internal guidelines on handling confidential information, as stated in the SEC order.
The investigation revealed that Morgan Stanley and Passi shared block trade details, anticipating these buy-side investors would leverage this information to establish significant short positions in the stock related to the impending block trade. This practice, known as "pre-positioning," was believed to reduce Morgan Stanley's risk when purchasing block trades.
The SEC defines a block trade as a substantial, privately negotiated stock sale executed outside public markets, typically initiated by an institutional investor like a private equity or venture capital firm. The identity and holdings of these selling shareholders are generally reported in the issuer's SEC filings or through the selling shareholder's mandatory SEC filings.
The nonprosecution agreement acknowledges Morgan Stanley's "extraordinary cooperation" during the Justice Department's investigation. It was noted that federal officials found no evidence of senior management's involvement or awareness of these malpractices, as reported in a Justice Department news release.
A Morgan Stanley spokesperson stated, "We are satisfied with the resolution of these investigations. We have full confidence in the improvements made to our block trading controls, including enhanced policies, procedures, training, and surveillance. At the heart of this issue is the misconduct of two former employees who breached our firm's policies, procedures, and fundamental principles, as detailed in the settlement documents."
