The U.S. Securities and Exchange Commission (SEC) has accused Morgan Stanley and its former executive, Pawan Passi, of fraud in block trading businesses. The company has agreed to pay over $249 million to settle the fraud charges as well as for failing to enforce information barriers.
According to a press release by the SEC, Morgan Stanley was involved in a multi-year fraud that included the disclosure of confidential information about the sale of block trades. Alongside this, the company was also charged for failing to enforce policies that concern the misuse of non-public information regarding these block trades.
The SEC press release further detailed that they had ordered Morgan Stanley to disclose non-public information about impending block trades to select buy-side investors from June 2018 through August 2021. This disclosure was based on the understanding that these investors would use the information to "pre-position" by taking a significant short position in the subject stock. If Morgan Stanley eventually purchased the block trade, these buy-side investors would request allocations from the block trade to cover their short positions. Additionally, it was found that Morgan Stanley failed to enforce information barriers preventing material non-public information involving certain block trades from being conveyed by the equity syndicate desk to a trading division on the firm's public side. This allowed insufficient scrutiny over whether trades were based on confidential discussions.
SEC Chair Gary Gensler stated, "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." He continued, "Instead, Morgan Stanley and Passi abused that trust by leaking that same information and using it to position themselves ahead of those trades. While their conduct may have earned them tens of millions of dollars on low-risk trades, it violated federal securities laws. Thanks to the hard work of SEC staff, they are being held accountable."
