Morgan Stanley to pay $249M over block trade probes

Morgan Stanley agreed to pay $249 million to the Justice Department and Securities and Exchange Commission to end a years-long US investigation into block trading that rattled the industry.

A non-prosecution agreement with federal prosecutors in Manhattan allows the bank to avoid criminal charges. Its former senior-ranking equities executive Pawan Passi, who was placed on leave and later left the bank after the probe intensified, will enter into a deferred-prosecution agreement over his handling of confidential information, according to the government. 

As part of the total, Morgan Stanley will pay about $113 million to the SEC, the regulator announced Friday. 

“Morgan Stanley, through the supervisor of its block trades business, Pawan Passi, deceived customers by promising confidentiality knowing that they would turn around and share that information with others to use to trade,” Manhattan US Attorney Damian Williams said in a statement Friday. 

Morgan Stanley said in a statement that it is “confident in the enhancements we have made to our controls around block trading, including strengthening our policies, procedures, training and surveillance.”

It said that “the core of this matter is the misconduct of two employees who violated the firm’s policies, procedures and our core values, as outlined in the settlement documents.” 

The Justice Department announced earlier that the bank would pay $153 million for its agreement with the DOJ, but offsets between the two government bodies bring that down to about $136 million, for a total of $249 million.

The investigation into highly sensitive block trades — in which banks typically help clients buy or sell chunks of stock large enough to move prices — has focused in part on whether employees shared or misused information about impending transactions in ways that broke securities laws. 

Passi’s attorney, George Canellos, said he was pleased the government didn’t pursue a criminal conviction of his client.

“The settlements allow Mr. Passi and his family to move past two very difficult years of intense government scrutiny of the block trading practices on Wall Street,” he said.

Block trading is one of a few Wall Street trading activities in which relationships still drive the flow of deals, and Morgan Stanley has dominated that business. Its success has also prompted some envy, and suspicion, from rivals who whispered about its practices.

While the SEC began scrutinizing the activity in 2018, the first signs of a more serious probe, from prosecutors, emerged when Passi was put on leave in November 2021.

Passi, who joined the firm in 2004, had risen to become the head of its US equity syndicate desk. That meant he led the bank’s communications with investors for equity transactions.

In the following months, the feds picked apart Morgan Stanley’s relations across the street, scooping up communications and searching for patterns as they set about looking for signs of market manipulation. Investigators’ inquiries showed a hunt for signs, if any, that money managers placed well-timed bets before block trades that have the power to drive down prices, or any signs of leaking material nonpublic information.

The SEC had been concerned for years about potential abuses in the highly secretive world of block trading, but executives overseeing the practice had privately expressed doubts that authorities would find anything amiss. 

Talks with investors about block trades often occur in legal gray areas, with bankers routinely canvasing prospective buyers about their hypothetical interest in specific stocks but taking care not to leak deals that are actually in the works.