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Enforcement

SEC Morgan Stanley to Pay Over $249 Million to Settle Fraud Charges

Washington D.C., Jan. 12, 2024 — The SEC has taken legal action against investment banking giant Morgan Stanley & Co. LLC and its former head of equity syndicate desk, Pawan Passi. The charges stem from a multi-year fraud scheme involving the improper disclosure of confidential information related to significant stock trades known as “block trades.” Additionally, Morgan Stanley is accused of failing to enforce its policies regarding the misuse of material non-public information related to block trades.

SEC Accusations

The SEC alleges that sellers entrusted Morgan Stanley and Passi with sensitive, non-public information regarding upcoming block trades, with the explicit understanding that this information would remain confidential. However, Morgan Stanley and Passi allegedly violated this trust by leaking the same information and exploiting it for their own gain. This misconduct, while potentially yielding tens of millions of dollars in profits from low-risk trades, is said to have violated federal securities laws.

Gary Gensler, Chair of the SEC, 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. 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 the federal securities laws. Thanks to the hard work of the SEC staff, they are being held accountable.”

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, expressed concern over market integrity, saying, “When market participants game the system for personal gain in this way, it erodes investor confidence and undermines market integrity. Today’s fraud charges underscore our commitment to holding wrongdoers accountable, no matter how complicated the fraud or sophisticated the perpetrators.”

Understanding Block Trades

A block trade involves the sale of a significant quantity of shares of a company’s stock, typically arranged and executed privately outside of the public markets. According to the SEC’s findings, from at least June 2018 through August 2021, Passi and a subordinate within Morgan Stanley’s equity syndicate desk allegedly disclosed non-public, potentially market-moving information about impending block trades to select buy-side investors, despite the sellers’ requests for confidentiality and Morgan Stanley’s own policies on confidential information handling.

The SEC’s orders indicate that Morgan Stanley and Passi shared block trade information with the understanding that these buy-side investors would use the information to “pre-position” themselves by taking a substantial short position in the stock involved in the upcoming block trade. If Morgan Stanley ultimately purchased the block trade, the buy-side investors would then request and receive allocations from Morgan Stanley to cover their short positions, thereby reducing Morgan Stanley’s risk in acquiring block trades.

Enforcement Actions

The SEC has determined that Morgan Stanley willfully violated Sections 10(b) and 15(g) of the Securities Exchange Act of 1934, along with Rule 10b-5(b) thereunder. As a result, the firm faces censure and is required to pay approximately $138 million in disgorgement, roughly $28 million in prejudgment interest, and an $83 million civil penalty.

Regarding Pawan Passi, the SEC found that he willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The enforcement action against Passi includes a $250,000 civil penalty, as well as associational, penny stock, and supervisory bars.

In a related development, the U.S. Attorney’s Office for the Southern District of New York has announced criminal resolutions with Morgan Stanley and Passi. The SEC’s ordered disgorgement and prejudgment interest for Morgan Stanley will be partially satisfied by the forfeiture and restitution paid by the firm, totaling $136,531,223, under its criminal resolution.

SEC Press Release

Sallah Astarita & CoxRepresenting Advisors and Investors, Nationwide.

Can The SEC Bring Criminal Charges?

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