Morgan Stanley has agreed to pay $249 million to settle investigations by the Justice Department and Securities and Exchange Commission over the bank’s block-trading practices, the agencies said Friday.
The bank admitted to making false statements in connection with block trades from at least June 2018 through August 2021, authorities said. But Morgan Stanley can avoid criminal charges as long as it abides — for three years — by a nonprosecution agreement it struck with the U.S. Attorney’s Office in Manhattan.
A former Morgan Stanley executive, Pawan Passi, struck a separate deferred prosecution agreement with authorities after admitting he misled clients with regard to confidentiality during the same time frame.
Passi, once the head of Morgan Stanley’s U.S. equity syndicate desk, agreed to a one-year ban from the securities industry and will pay a $250,000 fine to the SEC. He can, however, seek readmission to the brokerage industry after that ban expires.
Passi’s attorney, George Canellos, told Bloomberg he is pleased the U.S. attorney's office did not pursue a criminal conviction.
“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,” Canellos said in a statement also seen by Reuters.
Morgan Stanley put Passi on leave in November 2021 and dismissed him the following year, according to Financial Industry Regulatory Authority records seen by The Wall Street Journal.
Morgan Stanley, for its part Friday, said it is “confident in the enhancements we have made to our controls around block trading,” according to a statement seen by Bloomberg and The Wall Street Journal.
The bank has enhanced training for employees and launched clearer policies for block trading, authorities said.
“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,” Morgan Stanley said.
Prosecutors did not charge Charles Leisure, an executive who worked with Passi on block trades at Morgan Stanley, with wrongdoing, The Wall Street Journal reported. Leisure was also discharged by the bank in 2022, FINRA records show.
Passi, meanwhile, was scheduled to appear Friday before a U.S. magistrate judge. If the judge approves the deferred prosecution agreement, the criminal charges against Passi will be dismissed in about six months, according to The New York Times.
Block trades occur when a large shareholder — usually a company — sells a bunch of stock at once as a market-moving maneuver. A bank — Morgan Stanley, in this case — offers to buy the stock at a discount to the day’s closing price and sells the shares at a slight markup from what it paid.
“Sellers entrusted Morgan Stanley and Passi with material non-public information concerning upcoming block trades with the full expectation and understanding that they would keep it confidential,” SEC Chair Gary Gensler said in a statement Friday.
The bank and Passi “deceived customers by promising confidentiality knowing that they would turn around and share that information with others to use to trade,” U.S. Attorney Damian Williams said in a separate statement.
“When market participants game the system for personal gain in this way, it erodes investor confidence and undermines market integrity,” Gurbir S. Grewal, the SEC’s director of enforcement, said Friday.
Friday’s agreement “serves as a reminder that we are watching,” Williams said. “And we will continue to use all the tools at our disposal to root out fraud in our financial markets.”
The $249 million figure breaks down to an $83 million civil penalty, roughly $138 million in disgorgement and $28 million in prejudgment interest, the SEC said. The latter two categories were “partially satisfied” by forfeiture and restitution paid by Morgan Stanley, totaling $136.5 million.
Under the DOJ agreement, Morgan Stanley forfeited $72.5 million and paid $64 million in restitution to sellers harmed by the information leaks. That leaves about $113 million to the SEC.
Authorities noted that Passi forfeited $7.4 million in compensation from Morgan Stanley.
Morgan Stanley had told investors as early as May that it was in talks to resolve the block-trade investigation.