The Securities and Exchange Commission (SEC) on Friday charged investment banking major Morgan Stanley & Co. LLC and the former head of its equity syndicate desk, Pawan Passi, in a front-running case.
According to the US market regulator, the banking major and its employee were involved in a multi-year fraud by disclosing of confidential information about the sale of large quantities of stock known as “block trades.”
Penalty
The SEC’s order concerning Morgan Stanley finds that the firm wilfully violated Sections 10(b) and 15(g) of the Securities Exchange Act of 1934 and Rule 10b-5(b) thereunder, censures the firm, and orders it to pay approximately $138 million in disgorgement, approximately $28 million in pre-judgment interest, and an $83 million civil penalty. The SEC’s order concerning Passi orders him to pay a $250,000 civil penalty, and imposes associational, penny stock, and supervisory bars.
Morgan Stanley has agreed to pay $249.4 million imposed by the US regulator. The SEC also charged Morgan Stanley with failing to enforce its policies concerning the misuse of material non-public information related to block trades, the US securities regulator said in a release.
Block deals
A block trade generally involves the sale of a large quantity of shares of an issuer’s stock, privately arranged and executed outside of the public markets.
According to the SEC’s orders, from at least June 2018 through August 2021, Passi and a subordinate on Morgan Stanley’s equity syndicate desk disclosed non-public, potentially market-moving information concerning impending block trades to select buy-side investors despite the sellers’ confidentiality requests and Morgan Stanley’s own policies regarding the treatment of confidential information.
“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, Morgan Stanley and Passi abused that trust by leaking that same information and using it to position themselves ahead of those trades.”
According to the SEC, if Morgan Stanley eventually purchased the block trade, the buy-side investors would then request and receive allocations from the block trade from Morgan Stanley to cover their short positions. This pre-positioning reduced Morgan Stanley’s risk in purchasing block trades.
In a parallel action, the US Attorney’s Office for the Southern District of New York today announced criminal resolutions with Morgan Stanley and Passi. The SEC’s ordered disgorgement and pre-judgment interest for Morgan Stanley will be deemed partially satisfied by the forfeiture and restitution paid by the firm, which totals $136,531,223, pursuant to its criminal resolution.