(Bloomberg) --Morgan Stanley agreed to pay $249 million to the Justice Department and Securities and Exchange Commission to end a yearslong U.S. investigation into block trading that rattled the industry.
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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 "the core of this matter is the misconduct of two employees who violated the firm's policies" and that it is "confident in the enhancements we have made to our controls around block trading, including strengthening our policies, procedures, training and surveillance."
Envy and Suspicion
Block trading — in which banks typically help clients buy or sell chunks of stock large enough to move prices — 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.
The investigation into highly sensitive block trades has focused in part on whether employees shared or misused information about impending transactions in ways that broke securities laws.
"It's a win for everybody," Richard Hong, a former SEC enforcement official now at the law firm Morrison Cohen, said of the resolution. "The government gets a major fine and tells Wall Street that it has to block-trade by the book. And Morgan Stanley gets to move on from this without any lasting damage, and clean the closet for their new CEO."
Passi appeared Friday morning in federal court in Manhattan, where he was charged with securities fraud and pleaded not guilty. The charge will be dismissed if he fulfills certain conditions of the six-month deferred-prosecution agreement, including not committing a crime. He was released on bail after US Magistrate Judge Robyn Tarnofsky approved the DPA, saying Passi had already forfeited $7.4 million in compensation from the bank.
"You have been given a real opportunity here today to avoid a criminal conviction," Tarnofsky said. "I hope this is the only time I see this case again."
Passi's lawyer, George Canellos, said earlier that 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.
Feds' Scrutiny
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.
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. But the SEC had been concerned for years about potential abuses in the highly secretive world, though executives overseeing the practice had privately expressed doubts that authorities would find anything amiss.
Then the feds started to pick 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 had placed well-timed bets before block trades that have the power to drive down prices, or any signs of leaking material nonpublic information.
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.
