Morgan Stanley has reached a $249 million settlement to resolve investigations by federal prosecutors and the Securities and Exchange Commission's (SEC) into the firm's handling of certain large stock trades. As part of the settlement, the bank has entered into a nonprosecution agreement, avoiding criminal charges.
The investigations revealed that between 2018 and 2021, at least one Morgan Stanley employee misused confidential information in connection with block trades of stocks by some customers. The bank did not independently discover the deceptive trading or report it to authorities. However, prosecutors decided against filing criminal charges, citing the bank's cooperation with the investigation and the lack of evidence indicating corporate management's knowledge of wrongdoing.
Former Morgan Stanley employee Pawan Passi, who supervised most of the bank's block trading during the relevant period, entered into a deferred prosecution agreement. Passi admitted to sharing confidential information about customers' planned stock trades with other investors, allowing them to trade ahead of block sales.
Block trades, due to their size, can influence stock prices, and having advance knowledge of such trades can be lucrative for traders, especially hedge funds. The SEC stated that Morgan Stanley had profited from the misuse of confidential information by positioning themselves ahead of these trades. Investors receiving the confidential information would take short positions in anticipation of the stock price decline.
The SEC characterized Morgan Stanley's actions as engaging in front-running of customers for whom it handled block trades. In one instance, a Morgan Stanley employee discussed a block trade of shares of Invitation Homes with a hedge fund trader, who subsequently shorted shares of the rental company.
Pawan Passi faced one count of securities fraud, and the deferred prosecution agreement allows for the dismissal of charges in about six months if he complies with the terms.
Morgan Stanley expressed satisfaction in resolving the investigations, stating it had already implemented enhancements to controls around block trading. The penalties imposed by federal prosecutors and the SEC totaled over $400 million, but credits for overlapping payments resulted in a $249 million payment by the bank.
The bank's cooperation included the implementation of remedial measures, such as improved employee training and clearer policies for block trading.