SEC and DOJ Charge Morgan Stanley and Former Executive Pawan Passi in Block Trading Fraud

Both the U.S. Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) have charged Morgan Stanley & Co. LLC and its former head of equity syndicate desk, Pawan Passi, with engaging in a multi-year fraud scheme related to the disclosure of confidential information concerning the sale of large quantities of stock, commonly known as "block trades." The SEC's press release details the charges, and the DOJ has announced resolutions involving non-prosecution agreements (NPA) and deferred prosecution agreements (DPA).

The SEC charges assert that Morgan Stanley and Passi violated federal securities laws by leaking confidential information about impending block trades and misusing material non-public information. Sellers trusted the defendants with sensitive information, expecting them to keep it confidential. However, the SEC alleges that Morgan Stanley and Passi breached this trust by leaking the information and using it to gain an advantage in the market.

According to the SEC's orders, from June 2018 through August 2021, Passi and a subordinate on Morgan Stanley’s equity syndicate desk disclosed non-public information concerning upcoming block trades to select buy-side investors, disregarding sellers’ confidentiality requests and the firm's policies. The disclosed information was allegedly used by buy-side investors to "pre-position" themselves, taking a significant short position in the stock subject to the upcoming block trade. If Morgan Stanley eventually purchased the block trade, these investors would request and receive allocations from Morgan Stanley to cover their short positions, reducing the bank's risk.

The SEC's orders further claim that Morgan Stanley failed to enforce information barriers, allowing material non-public information about certain block trades to be conveyed from the private equity syndicate desk to a trading division on the public side of the firm. This failure prevented sufficient scrutiny of trades placed by the public side division during discussions with selling shareholders about potential block trades.

As part of the SEC's enforcement, Morgan Stanley has agreed to pay more than $249 million to settle the charges. The settlement includes approximately $138 million in disgorgement, around $28 million in prejudgment interest, and an $83 million civil penalty. Pawan Passi faces a $250,000 civil penalty and is subject to associational, penny stock, and supervisory bars.

Simultaneously, the DOJ announced that Morgan Stanley entered into an NPA, agreeing to pay more than $153 million for making false statements in connection with block trades from 2018 through August 2021. The NPA requires Morgan Stanley to forfeit profits, pay restitution, and cooperate with the U.S. government for at least three years. If the firm violates the NPA, the DOJ may prosecute Morgan Stanley.

Pawan Passi, the former head of Morgan Stanley’s U.S. Equity Syndicate Desk, entered into a DPA with the U.S. Attorney’s Office, admitting misconduct. Passi promised sellers confidentiality concerning potential sales but disclosed that information to buy-side investors, who used it to trade in advance of block sales. The DPA defers criminal prosecution during a period where Passi must demonstrate good behavior and fulfill the DPA's terms.

The coordinated efforts between the SEC and DOJ reflect a commitment to holding financial institutions and individuals accountable for fraudulent activities that erode investor confidence and undermine market integrity. The legal actions send a strong message about the consequences of market manipulation and misconduct within the financial industry.

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