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US Banking Giant Slapped with $249M Fine for Exploiting Insider Secrets

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TLDR: US banking giant Morgan Stanley has agreed to pay a $249 million fine for fraudulently abusing markets and profiting from confidential information. The US Securities and Exchange Commission (SEC) has charged the bank and its former head of equity syndicate desk, Pawan Passi, with leaking confidential information about the sale of large quantities of stocks to hedge funds, allowing them to manipulate share prices and buy shares at a discount. Morgan Stanley has been ordered to pay disgorgement, prejudgment interest, and a civil penalty, while Passi has been ordered to pay a civil penalty and faces other restrictions.

Key points:

  • Morgan Stanley and its former head of equity syndicate desk, Pawan Passi, have been charged with fraud by the SEC
  • The bank is accused of disclosing confidential information about the sale of stocks to hedge funds, allowing them to drive down share prices before buying at a discount
  • Morgan Stanley has been ordered to pay $249 million in disgorgement, prejudgment interest, and a civil penalty
  • Passi has been ordered to pay a civil penalty and is subject to other penalties imposed by the SEC

A US banking giant, Morgan Stanley, has been fined $249 million by the US Securities and Exchange Commission (SEC) for fraudulently abusing markets and profiting from confidential information. The SEC says that the bank and its former head of equity syndicate desk, Pawan Passi, disclosed confidential information about the sale of large quantities of stocks to hedge funds, allowing the funds to manipulate share prices and buy shares at a discount.

The bank routinely made the hedge funds aware of upcoming confidential sales, enabling the funds to make moves that would effectively drive share prices down. This would then allow Morgan Stanley to buy shares at a discounted rate. The SEC alleges that this conduct violated federal securities laws.

As a result of the fraudulent activities, Morgan Stanley and Passi allegedly profited over $100 million in illicit gains related to the illegal trading activities. The bank has been ordered to pay approximately $138 million in disgorgement, $28 million in prejudgment interest, and an $83 million civil penalty. Passi has been ordered to pay a $250,000 civil penalty and is also subject to associational, penny stock, and supervisory bars imposed by the SEC.

Block trades are high-volume transactions negotiated between institutions outside of the open market, and they have the potential to move markets. The leaking of confidential information by Morgan Stanley allowed buy-side investors to pre-position themselves by placing large short positions on the stock being sold, further manipulating share prices. The actions of Morgan Stanley and Passi violated the trust placed in them by sellers who had entrusted the bank with material non-public information.

The SEC has described the conduct of Morgan Stanley and Passi as a violation of federal securities laws and has praised the hard work of its staff in holding them accountable. While the SEC is not pursuing a criminal conviction against Passi, it has imposed various penalties and restrictions on him.

Morgan Stanley’s fine serves as a reminder of the consequences of fraudulent practices and the importance of maintaining confidentiality and trust in financial markets. The penalty sends a strong message that market manipulation and abuse of confidential information will not be tolerated.

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