Major US Banking Institution Slapped with $249 Million Fine for Market Manipulation and Unauthorized Disclosure of Confidential Information
A prominent US banking giant has reached a settlement agreement with a staggering $249 million fine after being caught using confidential client information to gain an unfair advantage in the market. The US Securities and Exchange Commission (SEC) has charged Morgan Stanley, along with its former head of equity syndicate desk, Pawan Passi, with fraud for their involvement in disclosing confidential details of large stock trades, commonly known as block trades.
The SEC’s investigation revealed that Morgan Stanley and Passi routinely shared insider information about upcoming and confidential stock sales with hedge funds. This allowed the hedge funds to strategically manipulate the market, resulting in a decrease in share prices. The bank would then swoop in and purchase the shares at a discounted price, profiting immensely from this orchestrated scheme.
SEC Chairman Gary Gensler expressed deep disappointment in Morgan Stanley’s actions, stating that the sellers had trusted the bank to keep their confidential information private. Instead, the bank flagrantly violated that trust by leaking the information and using it to their advantage. While this misconduct may have earned them significant profits on low-risk trades, it unequivocally violated federal securities laws. Gensler commended the SEC staff for their diligent work in holding Morgan Stanley accountable for their actions.
According to Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, Passi and his employer illegally gained over $100 million through their illicit trading activities. Morgan Stanley deliberately leaked the confidential information, fully aware that buy-side investors would use it to strategically position themselves by taking large short positions on the stocks being sold.
Block trades, which are high-volume transactions negotiated outside of the open market, have the potential to significantly impact the market. The $249 million settlement includes approximately $138 million in disgorgement, roughly $28 million in prejudgment interest, and an $83 million civil penalty.
Although the SEC is not seeking a criminal conviction for Pawan Passi, he will face consequences for his role in this misconduct. Passi has been ordered to pay a $250,000 civil penalty and has been subjected to associational, penny stock, and supervisory bars.
This case serves as a stark reminder of the severe repercussions that can result from market manipulation and the unauthorized disclosure of confidential information. The SEC’s swift action sends a strong message that such unethical behavior will not be tolerated, even from banking giants.