SEC Charged Morgan Stanley and Exec with Multi-year Fraud  

On January 12, 2024, the Securities and Exchange Commission (SEC) filed charges against investment bank Morgan Stanley & Co. LLC and its former equity syndicate desk head, Pawan Passi, for engaging in a multi-year fraud related to the disclosure of confidential information on in block trading.

Morgan Stanley agreed to settle the charges by paying over $249 million, addressing fraud allegations for improperly alerting favored institutional clients about big blocks of private stock coming to the market.

The wirehouse was originally in talks with the U.S. Justice Department and the Securities and Exchange Commission in November 2023 looking at the possibility that it could pay as much as $1 billion, according to Financial Advisor IQ.

What are Block Trades?  

Block trades refer to the sale or purchase of a large quantity of securities, typically in the form of stocks or bonds, as a single transaction. These transactions involve a significant number of shares or a high dollar value and are usually executed outside of the public market, often through a private negotiation between institutional investors or other large entities.

Block trades are different from regular market trades in that they are not executed on the open market through an exchange but are privately arranged between parties.

The size of a block trade can vary, but it is generally considered to be substantial enough to potentially impact the market price of the security. Due to their large size, block trades are often conducted by institutional investors, such as mutual funds, pension funds, or hedge funds, who have the financial capacity to handle such transactions.

The confidentiality of information related to block trades is crucial, as premature disclosure of such transactions could influence the market before the trade is completed.

SEC Alleges Breach of Trust with Block Trading

The SEC accused Morgan Stanley and Passi of breaching the trust of sellers who provided them with material non-public information about upcoming block trades, expecting confidentiality.

Instead, the bank and Passi allegedly leaked the information to gain an advantage in positioning themselves ahead of the trades. While this alleged conduct resulted in substantial profits for Morgan Stanley and Passi, the SEC contends that it violated federal securities laws.

According to the SEC’s complaints, between June 2018 to August 2021, Passi and a subordinate on Morgan Stanley’s equity syndicate desk allegedly disclosed non-public information regarding impending block trades to select buy-side investors. This disclosure reportedly occurred despite sellers’ confidentiality requests and the bank’s own policies.

The SEC claims that Morgan Stanley and Passi shared this information with the understanding that buy-side investors would use it to “pre-position” by taking significant short positions in the subject stock. This strategy aimed to reduce Morgan Stanley’s risk when purchasing the block trades.

The SEC found that Morgan Stanley failed to enforce information barriers, allowing confidential information about certain block trades to be conveyed from the private side of the firm to a trading division on the public side. Consequently, the firm couldn’t adequately scrutinize trades by the trading division based on confidential discussions with selling shareholders.

Morgan Stanley, as per the SEC’s order, willfully violated securities laws and is ordered to pay approximately $138 million in disgorgement, about $28 million in prejudgment interest, and an $83 million civil penalty.

Misrepresentations with Respect to Block Trading

According to Passi’s broker check report, he was discharged from Morgan Stanley in November 2022. He has one customer complaint filed against him in April 2022 for allegations of “MISREPRESENTATION WITH RESPECT TO BLOCK TRADING 2021.”

Passi is subject to a $250,000 civil penalty and faces associational, penny stock, and supervisory bars. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced criminal resolutions with Morgan Stanley and Passi. The ordered disgorgement and prejudgment interest for Morgan Stanley will be partially satisfied by the forfeiture and restitution paid by the firm under its criminal resolution, totaling $136,531,223.

Securities Fraud Attorneys 

This information is all publicly available and provided to you by The White Law Group.

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