Morgan Stanley to pay $249m to settle fraud charges in an SEC lawsuit

Morgan Stanley recently agreed to pay $249 million to settle fraud charges brought up by the US Securities and Exchange Commission (SEC). The regulator sued the bank after discovering that it failed to enforce information barriers in regard to the bank’s block trading practices.

Morgan Stanley agrees to pay the settlement

The SEC charged the banking giant after a years-long government probe, but it did not only go for the bank as a whole, but also for its former head of the equity syndicate desk, Pawan Passi. Both were charged with fraud involving the disclosure of confidential information, specifically, the information regarding the sale of block trades.

Morgan Stanley admitted to making false statements regarding the trades between 2018 and August 2021. However, the bank also said that it has rolled out clearer policies since then. Despite this, it recognized its fault, and it agreed to pay $249 million settlement.

Making the payment will resolve the charges against it, including penalties to both the agency and the restitution and forfeiture of ill-gotten gains. Furthermore, the US Justice Department also agreed to halt the prosecution of Passi, who also admitted to misconduct durig the same period — 2018 to August 2021.

According to a statement by the SEC’s director of the Division of Enforcement, Gurbir S. Grewal, Morgan Stanley and Pawam Passi leaked the material non-public information to mitigate their own risk, despite the fact that they assured their selling shareholders that their efforts to sell major blocks of stocks would remain confidential.

Apart from mitigating risks, Morgan Stanley also stood to win more block trade business, as well as generate more than $100 million in illegal gains.

Grewal added: “When market participants game the system for personal gain in this way, it erodes investor confidence and undermines market integrity. Today’s fraud charges underscore our commitment to holding wrongdoers accountable, no matter how complicated the fraud or sophisticated the perpetrators.”

Morgan Stanley and Passi betrayed investors’ trust

Gary Gensler, the SEC’s chair, also commented on the matter, stating that sellers entrusted Passi and Morgan Stanley with material, non-public information regarding their block trades with the understanding that they would be kept confidential. This is what they were led to believe and expect from a high-profile bank and one of its highest executives.

Instead, both the bank and Passi abused that trust by leaking the data in order to gain a personal advantage. “While their conduct may have earned them tens of millions of dollars on low-risk trades, it violated the federal securities laws. Thanks to the hard work of the SEC staff, they are being held accountable,” he added.