Jan. 12 (UPI) — Investment bank Morgan Stanley and a former executive abused the trust of customers while committing multiyear fraud worth millions of dollars, according to the U.S. Securities and Exchange Commission.
The SEC on Friday charged the New York investment giant and former head of its equity syndicate desk Pawan Passi for disclosing confidential information about large-volume securities transactions known as block trades.
Both Passi and Morgan Stanley knowingly violated sections of the Securities Exchange Act, according to the SEC filing.
Morgan Stanley was ordered to pay a civil penalty of $83 million.
The SEC filing also ordered the Manhattan-based firm to pay $28 million in prejudgment interest and roughly $138 million in disgorgement, meant to reverse the effect of ill-gotten gains.
The multinational investment bank then entered into a non-prosecution agreement that will see it pay a total of $153 million in financial penalties, the U.S. Attorney’s Office for the Southern District of New York confirmed Friday.
Passi, who supervised block trades during the time in question, between June 2018 and August 2021, admitted his involvement and entered into a deferred prosecution agreement with the U.S. Attorney’s Office. He is required to fulfill the terms of the agreement to avoid further criminal prosecution.
Morgan Stanley is subject to terms of the non-prosecution agreement for three years and will have a permanent criminal resolution on its record.
“Morgan Stanley, through the supervisor of its block trades business, Pawan Passi, deceived block sellers by promising confidentiality knowing that they would turn around and share that information with others to use to trade,” U.S. Attorney Damian Williams said in the statement issued by his office.
“Despite assuring selling shareholders that they would keep their efforts to sell large blocks of stock confidential, Morgan Stanley and Pawan Passi instead leaked that material non-public information to mitigate their own risk, win more block trade business, and generate over a hundred million dollars in illicit profits,” SEC Enforcement Division Director Gurbir S. Grewal said in a statement.
The SEC found the financial firm failed to enforce its own information separation barriers, which are strictly laid out. Morgan Stanley guidelines should have prevented block trade information making its way from the firm’s private trading side to the public side.
“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,” SEC Chair Gary Gensler said in the agency’s statement.
“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.”
