Financial services giant Morgan Stanley agreed to pay approximately $249 million as part of settlements with the Securities and Exchange Commission (SEC) and Department of Justice (DOJ) to resolve an admitted fraud scheme involving block trades perpetrated, in part, by a former senior employee at the firm.
In settling with the SEC, Morgan Stanley agreed to pay approximately $138 million in disgorgement, about $28 million in prejudgment interest, and an $83 million civil penalty, the agency announced Friday. The disgorgement and prejudgment interest totals will be deemed partially satisfied by the $137 million in forfeiture and restitution the DOJ ordered the firm to pay.
The DOJ also levied a fine of nearly $17 million that reflected a 35 percent discount for full cooperation. That fine was credited as part of the SEC’s penalty.
Morgan Stanley entered a three-year nonprosecution agreement with the U.S. Attorney’s Office for the Southern District of New York, under which it must continue to cooperate and provide information to the DOJ.
The details: From at least June 2018 through August 2021, Pawan Passi, the former head of Morgan Stanley’s equity syndicate desk, worked with an unnamed subordinate to disclose to certain buy-side investors nonpublic information concerning impending block trades, the SEC explained in its order.
The buy-side investors used the information to take short positions in the stocks subject to the upcoming block trades, thus reducing Morgan Stanley’s risk in purchasing block trades.
Morgan Stanley generated more than $138 million in profits across 28 transactions involving such conduct, the SEC said.
Passi admitted his role in the scheme in reaching a proposed deferred prosecution agreement with the DOJ. He was fined $250,000 by the SEC and subjected to certain supervisory bars for two years.
Compliance considerations: The SEC faulted Morgan Stanley for failing to enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information.
“Specifically, Morgan Stanley failed to enforce information barriers to prevent material nonpublic information involving certain block trades from being discussed by the syndicate desk, which sits on the private side of Morgan Stanley, with the institutional equity division, which was on the public side of the firm,” the agency said in its order.
The DOJ lauded Morgan Stanley for its cooperation, noting the firm’s controls, though unsuccessful in uncovering the misconduct, were applied in good faith. In 2022, the firm implemented remedial measures to create clearer policies governing its ability to communicate with the buy-side in advance of block trades.
The DOJ said it did not find evidence of corporate management being complicit or having knowledge of the scheme. The firm did not receive credit for voluntary self-disclosure.
Firm response: “We are pleased to resolve these investigations and are confident in the enhancements we have made to our controls around block trading, including strengthening our policies, procedures, training, and surveillance,” said Morgan Stanley in an emailed statement.
Editor’s note: This story initially incorrectly calculated the total of Morgan Stanley’s payments to be $266 million. It has been corrected to reflect the DOJ’s $17 million fine was credited as part of the SEC’s penalty.