Morgan Stanley agreed to pay $249 million in penalties to resolve investigations by federal prosecutors and securities regulators into the company's practices in executing some large stock trades, authorities and the bank said Friday.
As part of the settlement, Morgan Stanley entered into a non-prosecution agreement with the government and will not be charged with criminal wrongdoing.
The investigation found that at least one employee of the bank misused confidential information related to so-called block trades of stocks by some of its customers, according to statements and filings released by federal prosecutors in Manhattan and the Securities and Exchange Commission. The behavior occurred from 2018 to 2021, authorities said.
Federal prosecutors said in a statement that Morgan Stanley neither discovered the fraudulent trading itself nor reported it to authorities. But prosecutors said they decided not to file criminal charges against Morgan Stanley because the bank had cooperated with the investigation and there was no evidence that the bank's management was aware of any wrongdoing.
However, prosecutors reached a deferred prosecution agreement with Pawan Passi, a former Morgan Stanley employee who oversaw most of the bank's block trading from 2018 to 2021. Prosecutors said Mr. Passi admitted to sharing confidential information about some clients' planned large stock trades with other investors so they could “trade ahead of the block sales.”
Block trades are large enough to influence stock prices, and prior knowledge of these trades can be beneficial to traders, especially hedge funds.
SEC Chairman Gary Gensler said in a statement that Morgan Stanley profited from misuse of confidential customer information by “using it to position itself ahead of these trades.” The regulator also said that investors who received the confidential trading information took short positions ahead of these large stock sales in anticipation of a falling stock price.
In fact, the securities regulator said the Wall Street bank had been prioritizing the clients for whom it processed block trade sales, even though the SEC did not use that language in the cease-and-desist order approved by Morgan Stanley with the SEC
The SEC said in one case, a Morgan Stanley employee spoke with a trader at a hedge fund's London office about a block trade in shares of Invitation Homes, a single-family home rental company. The hedge fund trader then shorted shares of Invitation Homes.
Mr. Passi, who was charged with securities fraud, appeared before a U.S. judge on Friday morning, who agreed to a deferred prosecution agreement. Under the agreement, criminal charges against Mr. Passi will be dismissed in about six months if he complies with the terms.
“Morgan Stanley misled customers through the head of its block trades business, Pawan Passi,” said Damian Williams, U.S. Attorney for the Southern District of New York. “Although many factors worked in Morgan Stanley's favor, including extraordinary cooperation and remedial action, the misconduct was not discovered and voluntarily disclosed.”
Morgan Stanley said in a statement that it was “pleased to complete these investigations,” adding that it had already “enhanced our controls around block trading.”
George Canellos, a lawyer for Mr. Passi, said in a statement: “We are pleased that the U.S. Attorney's Office has agreed not to seek a criminal conviction for Mr. Passi in this complex matter.”
According to a brokerage industry report, Mr. Passi worked for Morgan Stanley for about a dozen years before the firm “fired” him due to the investigation.
The penalties imposed by federal prosecutors and the SEC against Morgan Stanley totaled just over $400 million. However, because the two settlements gave Morgan Stanley credit for overlapping payments, the total amount paid by the Wall Street firm is $249 million.
The Wall Street bank's collaboration included the introduction of remedial measures that included better training for employees and clearer guidelines for block trading.