Morgan Stanley Agrees to Pay $249 Million to Settle Block-Trading Probes
The settlement ends a long-running investigation of how the Wall Street firm sold large tranches of stock for sophisticated clients.
Morgan Stanley agreed Friday to pay $249 million to settle criminal and regulatory investigations into allegations that some employees improperly shared information about clients’ stock sales, the Manhattan U.S. attorney’s office said.
The resolution ends a long-running probe into how the bank sold large blocks of stock for institutional investors. Morgan Stanley obtained a nonprosecution agreement, a form of leniency that means it won’t face criminal charges as long as it cooperates with ongoing requests from prosecutors for three years and doesn’t violate its settlement agreement.
The bank’s total settlement includes an agreement to pay fines of about $112 million to the Securities and Exchange Commission. “We are pleased to resolve these investigations and are confident in the enhancements we have made to our controls around block trading,” the bank said Friday in a statement.
A former executive in charge of block trading, Pawan Passi, admitted that he misled clients from 2018 to 2021 about how he would handle their trades. He agreed to a one-year bar from the securities industry and to pay a $250,000 fine to the SEC.
Passi received a probationary deal known as a deferred prosecution agreement, which typically is reserved for low-level offenders without a criminal history. His separate deal with the SEC allows Passi to seek readmission to the brokerage industry after his one-year bar expires.
Block trades occur when a large shareholder, such as a private-equity firm, wants to sell a swath of stock at once. A bank such as Morgan Stanley offers to buy the block at a discount to the day’s closing price and then sells the shares at a slight markup from what it paid. In the years leading up to the probe, Morgan Stanley was the dominant bank in block trading.
Prosecutors said Passi promised some selling shareholders that he would keep their potential sales confidential but knew he would talk to investors and that they would use the information to trade in advance of the block sales.
Potential buyers of block shares, such as hedge funds, sometimes short the stock once they hear about the sales. That can drive down the price that the selling shareholder receives.
Morgan Stanley’s settlement includes $64 million in restitution, which would go to compensate sellers harmed by the information leakage. The bank’s civil fraud settlement with the SEC says Passi’s communications with investors reduced Morgan Stanley’s risk in purchasing block trades.
Prosecutors’ investigation was complicated by questions about whether the potential stock sales were material nonpublic information. In some cases, block trades involve shares that sophisticated investors know are coming because the sellers are executives whose stockholdings are publicly disclosed and who are only able to sell after a defined period.
Defense attorneys also pointed out that regulators decades ago had approved of banks’ disclosing block orders so they could find the best price for a seller. The SEC in 1979 issued guidance that said brokers could “search and negotiate for a matching interest” to sell a block for a customer.
A 2022 Wall Street Journal analysis of nearly 400 block trades over three years indicated that information about the sales routinely leaks out ahead of time.
Morgan Stanley put Passi on leave in November 2021 and discharged him the following year, according to Financial Industry Regulatory Authority records. Charles Leisure, another senior executive who worked with Passi on block trades at the bank, was also discharged in 2022, according to Finra records. Prosecutors didn’t charge Leisure with wrongdoing.
Write to Dave Michaels at dave.michaels@wsj.com, AnnaMaria Andriotis at annamaria.andriotis@wsj.com and Corrie Driebusch at corrie.driebusch@wsj.com
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First Published:12 Jan 2024, 07:40 PM IST
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