The Securities and Exchange Commission (SEC) today accused the investment banking giant Morgan Stanley & Co. LLC and its former head of equities, Pawan Passi, for years of fraud involving the disclosure of confidential information related to the sale of large quantities. shares known as “exclusive transactions”. The SEC also accused Morgan Stanley of failing to enforce its policies regarding the misuse of material non-public information related to block trading.
A bundle transaction generally involves the sale of a large amount of shares of an issuer’s stock, which is arranged privately and executed outside of the public markets.
Pursuant to SEC orders, from at least June 2018 through August 2021, Passi and an associate in Morgan Stanley’s equities office disclosed non-public, potentially market-moving information about upcoming block trades to selected investors from market, despite the confidentiality of seller requests and Morgan Stanley’s own policies regarding the handling of confidential information.
The SEC’s orders find that Morgan Stanley and Passi disclosed the block trading information with the understanding that these market-side investors would use the information to “pre-position” by taking a significant short position in the stock that was the subject of the upcoming block trade transactions.
According to the SEC’s orders, if Morgan Stanley ultimately purchased the block trade, market-side investors would request and receive block trade distributions from Morgan Stanley to cover their short positions. This pre-positioning reduced Morgan Stanley’s risk in the block trading market.
The SEC order further finds that Morgan Stanley failed to impose information barriers to prevent the transfer of material non-public information relating to certain block trades from the equity syndicate desk, which is located on the private side of Morgan Stanley, to a trading department at public side of the company. As a result, the company was unable to adequately verify whether trades from this segment, placed while the stock syndicate office was in discussions with selling shareholders about potential block trades, were based on such confidential discussions.
SEC order on Morgan Stanley finds that firm willfully violated Sections 10(b) and 15(g) of the Securities Exchange Act of 1934 and Rule 10b-5(b) thereunder, criticizes the firm and ordering it to pay approximately $138 million in disgorgement, approximately $28 million in prejudgment interest and an $83 million civil penalty.
The SEC’s order against Passy finds that he willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, orders him to pay a civil penalty of $250,000 and imposes partnership, penny stock and supervisory bars barriers.
In a separate action, the US Attorney’s Office for the Southern District of New York today announced criminal settlements with Morgan Stanley and Passi. The SEC’s ordered disgorgement and prejudgment interest against Morgan Stanley will be deemed satisfied in part by the forfeiture and restitution paid by the company, which totals $136,531,223, according to its criminal judgment.