Charged with Fraudulent Activities Tied to the Disclosure of Confidential Information about Block Trades
In a revelation that underscores the critical importance of maintaining the sanctity of confidential information within the financial markets, the Securities and Exchange Commission (SEC) has charged Morgan Stanley & Co. LLC and its former equity syndicate desk head, Pawan Passi, with engaging in fraudulent activities tied to the disclosure of confidential information about block trades. This case highlights a blatant disregard for ethical standards and showcases the SEC’s unwavering commitment to upholding market integrity and investor trust.
By their nature, block trades involve the sale of large quantities of stock outside the public markets, necessitating a high degree of confidentiality to prevent undue market impact. From at least June 2018 through August 2021, Morgan Stanley and Passi were entrusted with sensitive, potentially market-moving information by sellers expecting discretion and integrity. Contrary to these expectations, Passi and a subordinate disclosed this information to select investors, allowing them to “pre-position” by taking significant short positions in anticipation of the block trades. This manipulation compromised the sellers’ confidentiality and skewed market dynamics for personal and institutional gain.
The SEC’s findings reveal a systematic exploitation of confidential information. Morgan Stanley and Passi leaked details of impending block trades to curry favor, mitigate risk, and secure illicit profits exceeding a hundred million dollars. As SEC Chair Gary Gensler and Director of the SEC’s Division of Enforcement Gurbir S. Grewal pointed out, this conduct represents a gross abuse of trust and a violation of federal securities laws, yielding tens of millions of dollars through low-risk, manipulative trades.
Moreover, Morgan Stanley’s failure to enforce information barriers between its private equity syndicate desk and a public trading division further facilitated this breach. The lack of oversight allowed confidential information to flow unchecked, undermining the firm’s ability to scrutinize trades for potential conflicts of interest or insider trading.
The SEC’s orders against Morgan Stanley and Passi testify to the agency’s diligence and investigative prowess. Morgan Stanley has been censured and ordered to pay approximately $138 million in disgorgement, $28 million in prejudgment interest, and an $83 million civil penalty. Passi faces a $250,000 civil penalty along with associational, penny stock, and supervisory bars, highlighting the personal accountability accompanying such breaches of trust.
This case is paralleled by criminal resolutions announced by the U.S. Attorney’s Office for the Southern District of New York, emphasizing the serious legal consequences of manipulating market mechanisms for personal advantage. The ordered disgorgement and prejudgment interest for Morgan Stanley will be partially offset by forfeiture and restitution paid under its criminal resolution, integrating the penalties across regulatory and criminal justice frameworks.
The SEC’s action against Morgan Stanley and Pawan Passi sends a clear message to the financial industry: misusing material non-public information and violating confidentiality agreements will not be tolerated. It reaffirms the SEC’s role in safeguarding market fairness and protecting investor interests against the corrosive effects of insider manipulation and fraud. For the investing public and market participants, this case is a reminder of the importance of ethical conduct and the severe repercussions for those who choose to circumvent the law.
