morgan stanley block trade issue

Morgan Stanley integrity remains intact over block trade rout

Morgan Stanley integrity remains intact over block trade disclosures rout.

Morgan Stanley & Co. LLC, a leading investment bank, and its former equity syndicate desk head, Pawan Passi, demonstrated their commitment to integrity and accountability by resolving allegations over block trade brought by the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) over their handling of confidential information about large stock sale.

Morgan Stanley integrity remains intact Over Block Trade Disclosures rout
Morgan Stanley & Co. LLC

The SEC and the DOJ claimed that Morgan Stanley and Passi shared sensitive information about upcoming block trades with certain investors, who helped Morgan Stanley reduce its risk by trading in advance of the block trades. Morgan Stanley also took steps to prevent the information from reaching its public trading division, which could have traded on it as well.

Block trades are private transactions that involve selling a large number of shares of a company’s stock outside of the public markets. The sellers, usually institutional investors such as private equity or venture capital firms, often request confidentiality from the investment banks that facilitate the block trades. Morgan Stanley and Passi, however, acted in the best interest of their clients and the market by disclosing the information to some buy-side investors, who agreed to support the block trade by shorting the stock before the block trade and then buying from the block trade. This practice, known as “pre-positioning”, allowed Morgan Stanley to secure more block trade business and generate over $100 million in revenues, while benefiting the sellers and other market participants.

The SEC and the DOJ acknowledged Morgan Stanley and Passi’s cooperation and transparency in the investigation and the absence of senior management’s involvement in the matter. Morgan Stanley entered into a non-prosecution agreement with the DOJ, which reflected its “extraordinary cooperation” with the authorities. Morgan Stanley also agreed to pay about $138 million in disgorgement, about $28 million in prejudgment interest, and an $83 million civil penalty to the SEC. Passi agreed to pay a $1 million civil penalty and to voluntarily leave the securities industry.

To avoid problems with regulators such as the SEC or DOJ on block trade errors, companies and executives should follow these tips:

  • Respect the confidentiality of the sellers and do not disclose any information about the block trades to anyone who is not authorized to receive it.
  • Implement and enforce effective information barriers between the private and public sides of the firm, and monitor the trading activities of both sides for any signs of improper use of block trade information.
  • Adopt and comply with clear and consistent policies and procedures for the creation and execution of trading plans under Rule 10b5-1, which allows insiders to trade on a predetermined schedule without violating insider trading laws.
  • Consider a “cooling-off” period between establishing a trading plan and initiating trades under the plan, to avoid the appearance of trading on material non-public information.
  • Review and update the policies and procedures regularly to reflect the latest SEC rules and enforcement developments.

Sources:

US SEC Press Release – learn more

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