Morgan Stanley has reached a settlement and agreed to pay $249 million in response to charges that two members of its private trading desk leaked confidential information about upcoming stock sales. This allowed buyers to take short positions in these equities and make a profit.
The settlement resolves civil charges brought by the Securities and Exchange Commission (SEC) and a parallel criminal action brought by the Justice Department. As part of the settlement, Morgan Stanley has entered into a nonprosecution agreement with the Justice Department, which requires the company’s ongoing cooperation for three years.
In addition to the settlement with Morgan Stanley, the government has also settled charges against Pawan Passi, the former head of Morgan Stanley’s equity syndicate desk. Passi has agreed to a ban from the industry and a $250,000 civil penalty as part of his settlement with the SEC. He has also entered into a deferred-prosecution agreement with the Justice Department.
According to the government’s complaint, Passi was involved in the fraud from June 2018 until August 2021 and worked in collaboration with an unnamed subordinate.
In a statement, Morgan Stanley expressed its satisfaction with resolving these investigations and highlighted the improvements made to its controls around block trading. The firm has strengthened its policies, procedures, training, and surveillance in response to this matter. Morgan Stanley also emphasized that this case involved the misconduct of two employees who violated the firm’s policies, procedures, and core values.
A lawyer representing Passi did not immediately respond to a request for comment. According to the SEC’s settlement order, Passi admitted that the agency’s findings were true.
This settlement marks the conclusion of a lengthy investigation into Morgan Stanley’s block-trading operations. The firm had been cooperating with an SEC inquiry since June 2019, and the U.S. Attorney’s Office for the Southern District of New York initiated its own investigation in August 2021. Passi’s employment with Morgan Stanley was terminated in November 2022, as per BrokerCheck, an online database.
Morgan Stanley Faces Charges in Connection to Block-Trading Scheme
To rectify their oversight, Morgan Stanley has taken measures to implement clearer policies and provide training to employees involved in block trades. These changes were necessary as the firm’s failure to enforce information barriers led to the disclosure of material nonpublic information. Specifically, the equity syndicate desk, responsible for private transactions, failed to prevent the leakage of confidential conversations regarding block trades to the public-facing trading division.
The consequences of these lapses were severe, as Morgan Stanley neglected to evaluate whether trades conducted on the public side of the firm were influenced by insider knowledge originating from the equity syndicate desk. In doing so, they breached the trust of sellers who had shared material nonpublic information, expecting confidentiality.
Gary Gensler, Chairman of the SEC, expressed his disappointment in Morgan Stanley’s betrayal of trust. He remarked, “Sellers entrusted Morgan Stanley and Passi with material nonpublic information concerning coming block trades with the full expectation and understanding that they would keep it confidential.” Gensler emphasized the importance of integrity in financial markets and promised to hold wrongdoers accountable.
Gurbir Grewal, Director of Enforcement at the SEC, echoed these sentiments, highlighting the detrimental impact of schemes like the one at Morgan Stanley on investor confidence and market integrity. He emphasized their commitment to taking action against those who exploit the system for personal gain.
The charges filed against Morgan Stanley underline the crucial role of institutions in safeguarding market fairness and the trust of their clients.