A US banking giant has agreed to pay a quarter of a billion dollars for promising confidentiality to clients – and revealing their information to gain a market advantage.
The U.S. Securities and Exchange Commission (SEC) says it’s charging Morgan Stanley and its former head of equity syndicate desk, Pawan Passi, with fraud for disclosing confidential information about the sale of large quantities of stocks, or block trades.
According to the SEC, Morgan Stanley and Passi routinely made hedge funds aware of the upcoming and confidential sales, allowing the hedge funds to make moves that effectively drove share prices down.
At that point, the bank could buy shares at a discount.
Says Chairman Gary Gensler,
“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, says Passi and his employer profited over $100 million in illicit gains related to the illegal trading activities.
Morgan Stanley leaked the information with an understanding that the buy-side investors would then use the information to pre-position themselves by placing large short positions on the stock that was being sold.
Block trades are high-volume transactions with the potential to move markets that are usually negotiated between institutions outside of the open market.
The bank has been ordered to pay approximately $138 million in disgorgement, approximately $28 million in prejudgment interest, and an $83 million civil penalty.
The SEC is not pursuing a criminal conviction of Passi and he will not spend time behind bars.
The agency has ordered him to pay a $250,000 civil penalty and imposed associational, penny stock, and supervisory bars.
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