by Morgan Stanley has agreed to pay $249 million in fines to resolve investigations by federal prosecutors and securities regulators into the company’s practices in handling some large stock trades, authorities and the bank said Friday.
As part of the settlement, Morgan Stanley entered into a non-prosecution agreement with the government and will not be charged with any criminal offenses.
Investigations found that at least one bank employee had misused confidential information in connection with so-called stock block trades by some of his clients, according to statements and documents released by federal prosecutors in Manhattan and the Securities and Exchange Commission. Stock Market and Securities. The conduct took place between 2018 and 2021, authorities said.
Federal prosecutors said in a statement that Morgan Stanley had not discovered the deceptive trading on its own or reported it to authorities. But prosecutors said they had decided not to pursue criminal charges against Morgan Stanley because the bank had cooperated with the investigation and because there was no evidence that the bank’s corporate management was aware of any wrongdoing.
However, prosecutors entered into a deferred prosecution agreement with Pawan Passi, a former Morgan Stanley employee who oversaw most of the bank’s block trading from 2018 to 2021. Prosecutors said Passi admitted that he had shared confidential information about the plans of some clients. Big stocks trade with other investors so they can “trade before block sales.”
Block trades are large enough to move stock prices, and advanced knowledge of those trades can be profitable for traders, particularly hedge funds.
Gary Gensler, chairman of the SEC, said in a statement that Morgan Stanley had profited from the misuse of confidential client information by “using it to position itself ahead of those trades.” The regulator also said that investors who had received the confidential trading information would take short positions ahead of those large share sales in anticipation of the share price falling.
In fact, the securities regulator said the Wall Street bank had engaged in early foreclosure of clients for whom it handled the sale of block trades, although the SEC does not use that language in the cease-and-desist order Morgan agreed to. Stanley. with the SEC
The SEC said that in one case, a Morgan Stanley employee had discussed a block trade in shares of Invitation Homes, a single-family rental company, with a trader working in the London office of a hedge fund. The hedge fund operator subsequently shorted shares of Invitation Homes.
Passi, charged with one count of securities fraud, appeared Friday morning before a U.S. judge, who approved a deferred prosecution agreement. Under the agreement, criminal charges against Passi will be dismissed in about six months if he complies with the terms.
“Morgan Stanley, through the supervisor of its block trading business, Pawan Passi, deceived clients,” said Damian Williams, U.S. Attorney for the Southern District of New York. “While many factors weighed in Morgan Stanley’s favor, including extraordinary cooperation and remediation, the misconduct was not voluntarily discovered or disclosed.”
Morgan Stanley said in a statement that it was “pleased to resolve these investigations” and added that it had already made improvements “to our controls around block trading.”
George Canellos, Mr. Passi’s lawyer, said in a statement: “We are pleased that the US Attorney’s Office has agreed not to pursue a criminal conviction against Mr. Passi in this complex matter.”
Passi worked for Morgan Stanley for about a dozen years before the firm “terminated” him over the investigation, according to a brokerage industry report.
The penalties imposed by federal prosecutors and the SEC against Morgan Stanley amounted to just over $400 million. But because the two deals gave Morgan Stanley credit for overlapping payments, the total amount paid by the Wall Street firm is $249 million.
The Wall Street bank’s cooperation included implementing corrective measures that involved better training for employees and clearer policies for block trading.
