Morgan Stanley will pay $249 million to settle a criminal investigation, as well as a related Securities and Exchange Commission probe. The SEC said the bank generated more than $100 million in illicit profits as a result of misconduct by Pawan Passi, the bank’s former head of its US equity syndicate desk, and another employee.
Morgan Stanley has been under investigation by the SEC since 2019 over its handling of block trades (a business that the bank dominates), and the US attorney’s office in Manhattan started a similar probe in 2021. (Block trades are large, privately negotiated securities transactions arranged outside of public markets and typically carried out by hedge funds, institutional investors and high-net-worth investors.)
The SEC charged Morgan Stanley with “failing to enforce its policies concerning the misuse of material non-public information related to block trades,” that agency said. Block trades typically involve large numbers of shares of a company’s stock in privately arranged transactions executed outside 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 [they] abused that trust by leaking that same information and using it to position themselves ahead of those trades.”
Gurbir Grewal, enforcement director at the SEC, added that Morgan Stanley broke the rules “to mitigate their own risk, win more block trade business, and generate over a hundred million dollars in illicit profits”. FT
Damian Williams, the US attorney for the Southern District of New York, said that the probe “serves as a reminder that we are watching”.
They may be watching, but despite the criminal probe, it’s unlikely that anyone will be prosecuted. Both the bank and Passi entered a non-prosecution agreement, and Passi will avoid criminal prosecution if he demonstrates good behaviour for 3 years. He will not pay a monetary penalty because he forfeited about $7.4 million in compensation from Morgan Stanley. It is unclear how his guilt is alleviated by the fact that he forfeited salary or bonus pay for performing his duties while partaking in criminal action.
Passi admitted that “from 2018 through August 2021, he promised sellers of certain equity blocks that Morgan Stanley would keep information concerning their potential sales confidential, knowing that he would disclose that information to buy-side investors and that those investors would use the information to trade in advance of the block sales,” according to prosecutors.
The SEC’s order in the probe says that a former senior member of the syndicate desk participated with Passi in disclosing material non-public information to select investors who profited from the information about trades that Morgan Stanley had been invited to bid or negotiate on.
Morgan Stanley will pay $249 million to settle the criminal investigation and the related SEC probe. The misconduct was not uncovered by the bank and was not voluntarily disclosed. As part of the settlement, Morgan Stanley entered into a non-prosecution agreement with the U.S. Attorney’s Office for the Southern District of New York for making false statements related to certain block trades executed from 2018 through August 2021, the office said. MSN
“Morgan Stanley and Passi abused […] trust by leaking […] information and using it to position themselves ahead of those trades. […] Their conduct […] earned them tens of millions of dollars on low-risk trades and violated the federal securities laws,” Gensler said. SEC
Prosecutors said that the non-prosecution deal with Morgan Stanley “recognizes serious misconduct to which Morgan Stanley has admitted and was uncovered by the Government and was no voluntarily self-disclosed.” MSN
But prosecutors also said the agreement recognizes that the bank “provided extraordinary cooperation” with the investigation and that the probe did not find evidence of “corporate management’s complicity in or knowledge of the wrongdoing.” CNBC
“Morgan Stanley’s controls, while ultimately unsuccessful in uncovering the misconduct, were designed in part to detect misconduct in the block trades business and were applied in good faith,” the U.S. Attorney’s Office said. Justice.gov
In a statement, Morgan Stanley said, “We are pleased to resolve these investigations and are confident in the enhancements we have made to our controls around block trading, including strengthening our policies, procedures, training and surveillance.” Barrons
“The core of this matter is the misconduct of two employees who violated the Firm’s policies, procedures and our core values, as outlined in the settlement documents,” the bank said. Barrons
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