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Morgan Stanley agreed to pay $249mn to settle long-running federal investigations into misconduct at its block trading business, as one of its former top investment bankers admitted to leaking confidential information to clients.
On Friday, the Securities and Exchange Commission charged the bank and the former head of its US equity syndicate desk, Pawan Passi, with fraud. The Wall Street lender also entered into a three-year non-prosecution agreement with the US attorney’s office in Manhattan as part of a parallel criminal probe.
“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”.
The $249mn total settlement includes $153mn in penalties from the Department of Justice.
The resolution removes one of the main issues facing new chief executive Ted Pick, who took over from James Gorman at the start of the month.
“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,” the bank said in a statement.
Morgan Stanley has been under investigation by the SEC over its handling of block trades — a lucrative business that the bank has dominated for years — since 2019, while the US attorney’s office in Manhattan started a similar probe in 2021.
Block trades are bulk sales of shares executed by an investment bank, normally for a client, which tend to be big enough to move markets.
Ahead of a potential trade, bankers will often speak with potential buyers to get a sense of market interest in a certain stock, sometimes sharing details of the trade under a non-disclosure agreement and other times using coded terms designed to mask the company involved.
The practice of “wall crossing” to talk with buyers is fraught with risks that other investors will begin to trade on the information. The SEC had sought information from an array of banks about their communications with a range of buyers including hedge funds.
The SEC issued Passi with a $250,000 civil penalty and barred him from working in the industry. He admitted to misconduct and agreed a deferred prosecution agreement with the US attorney, subject to court approval. He will avoid criminal prosecution if he demonstrates good behaviour throughout the period of that agreement.
Passi did not immediately respond to an emailed request for comment.
According to the DoJ, Passi “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 buyside investors and that those investors would use the information to trade in advance of the block sales”. Passi was placed on leave in 2021 and left the bank in late 2022.
Last year, the bank warned it also faced potential civil liability from investor lawsuits over allegations it caused share prices to fall before executing block trades.
Morgan Stanley reports its full-year results on Tuesday.