- The allegations involve the improper leaking of confidential information in bank trading violations.
- Morgan Stanley has been under the SEC’s scrutiny since 2019.
Morgan Stanley has agreed to pay $249 million to settle federal investigations surrounding misconduct in its lucrative block trading business. The Securities and Exchange Commission (SEC) has charged the bank and its former Head of the US Equity Syndicate desk with fraud.
According to a statement by the regulator, these allegations involve improperly leaking confidential information ahead of bulk share sales. Morgan Stanley, a longstanding dominator in block trades, has been under SEC scrutiny since 2019. Pawan Passi, the former Head of the US Equity Syndicate Desk, faced charges of breaching trust by leaking confidential information.
The SEC’s Chair, Gary Gensler, mentioned: “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.”
“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.”
See Related: Morgan Stanley to Slash 3,000 Jobs Amid Market Uncertainty
Breach of Trust in Block Trading
The SEC and the US attorney’s office in Manhattan orchestrated a comprehensive probe, leading to a $249 million settlement, with $153 million in penalties from the Department of Justice. Gensler has condemned Morgan Stanley, stating that the bank and Passi abused sellers’ trust by leaking confidential information and using it to gain an advantage in trades.
Block trades, involving bulk sales of shares by investment banks, are crucial market movers. The practice of “wall crossing,” where bankers communicate with potential buyers ahead of trades, comes with inherent risks. Morgan Stanley’s breach of trust reveals the challenges of maintaining confidentiality and the potential market impact when such information is leaked, the Financial Times reported.
Pawan Passi, slapped with a $250,000 civil penalty by the SEC, is barred from working in the industry. However, he has secured a deferred prosecution agreement with the US attorney, contingent on demonstrating good behavior. Passi’s admission of misconduct sheds light on the intense government scrutiny faced by Wall Street regarding block trading practices.
