Pawan Passi, former head of Morgan Stanley's U.S. equity syndicate desk, leaves after his arraignment at the United States District Court for the Southern District of New York in New York City, U.S., January 12, 2024. REUTERS/Shannon Stapleton
New York: For years, hedge funds knew that one man at Morgan Stanley could make them millions.
A big block of shares would come up for sale, and block-trading head Pawan Passi would tip off the funds. One even told Passi he had put that investor “in the game” (adding a colourful modifier) and that the investor “would be at the kiddie table” if not for him.
“I know who my daddy is,” the investor said in a call, according to US federal prosecutors.
Last Friday Passi entered into a deferred-prosecution agreement with the US Justice Department, in which he pleaded not guilty to securities fraud, to settle a long-running probe into his and Morgan Stanley’s trading practices.
He mishandled confidential information, he acknowledged, agreeing to a one-year ban from the brokerage business.
That agreement and the bank’s own non-prosecution deal with the United States, which Bloomberg reported last Thursday, come after a years-long descent for Passi, once a beloved member of Morgan Stanley whose desk brought in US$1.4bil in revenue from 2018 to 2021.
Passi’s fall also scarred Morgan Stanley, which agreed last Friday to pay a total of US$249mil to the Justice Department and the Securities and Exchange Commission (SEC) to settle their probes into its block-trading business. Its pact allows the bank to avoid criminal charges.
Talks with investors about block trades – purchases or sales of amounts of stock big enough to move the share price – often occur in legal gray areas. Bankers routinely canvass prospective buyers about their hypothetical interest in specific stocks. They take care not to leak deals that are actually in the works.
Except when they don’t. Prosecutors outlined a case against Passi and the bank that included years of alleged leaks, lies and compromised confidential information.
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 its enhanced controls. Passi’s lawyer George Canellos said earlier that he was pleased the government didn’t pursue a criminal conviction of his client.
The SEC has been concerned for years about potential abuses in the highly secretive world of block trading. Executives overseeing the practice had privately expressed doubts that authorities would find anything.
In the end, Passi – the centre of the government’s case – can move to have the charge against him dismissed after six months if he abides by the terms of his agreement. And Morgan Stanley, accused of lax controls over how it handled confidential information, had to concede that it engaged in misconduct and pay a fat penalty but escaped criminal prosecution.
Richard Hong, a former SEC enforcement official now at the law firm Morrison Cohen, called it “a meaningful case for the SEC and Justice Department,” though not one he expects to change the industry overnight.
“This is not going to shake the Earth,” Hong cautioned.
Still, he said, “it’s a win for everybody. 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 chief executive officer.” — Bloomberg
