"When market participants game the system for personal gain in this way, it erodes investor confidence and undermines market integrity," said Gurbir S. Grewal, the SEC's enforcement division director, in a statement. "Today's fraud charges underscore our commitment to holding wrongdoers accountable, no matter how complicated the fraud or sophisticated the perpetrators."
From at least June 2018 through August 2021, Pawan Passi, formerly the head of Morgan Stanley's equity syndicate desk in the Americas, and a subordinate 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, according to the SEC order.
Investigators found that Morgan Stanley and Passi disclosed the block trade information with the understanding that those buy-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, according to the SEC order.
Moreover, 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, according to an accompanying SEC news release.
The SEC described a block trade as the sale of a large quantity of shares of an issuer's stock, privately arranged and executed outside of the public markets. The shares are typically offered by a selling shareholder, which is usually an institutional investor such as a private equity or venture capital firm, whose identity and holdings typically have been reported in the issuer's SEC filings or through required SEC filings by the selling shareholder.
The nonprosecution agreement recognizes that Morgan Stanley provided "extraordinary cooperation" with the Justice Department's investigation and federal officials did not uncover evidence of corporate management's complicity in or knowledge of the wrongdoing, according to a Justice Department news release.
"We are pleased to resolve these investigations and are confident in the enhancements we have made to our controls around block trading, including strengthening our policies, procedures, training and surveillance," a Morgan Stanley spokesperson said in a statement. "The core of this matter is the misconduct of two employees who violated the firm's policies, procedures and our core values, as outlined in the settlement documents."