Morgan Stanley Settles Fraud Scheme Case with SEC and DOJ for $249 Million

In a significant legal development, Morgan Stanley, a major financial services player, has agreed to a settlement totaling approximately $249 million to resolve a fraud scheme case with both the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ). The case revolves around an admitted fraud scheme linked, in part, to a former senior employee at the financial institution. The settlement terms with the SEC include Morgan Stanley paying around $138 million in disgorgement, roughly $28 million in prejudgment interest, and a substantial $83 million civil penalty. Notably, the disgorgement and prejudgment interest figures will be considered partially satisfied by the $137 million in forfeiture and restitution mandated by the DOJ.

As part of the DOJ's involvement, a fine of nearly $17 million was imposed on Morgan Stanley, reflecting a 35 percent discount attributed to the firm's full cooperation. This fine was subsequently credited as part of the SEC's overall penalty. The admitted fraud scheme, which transpired from June 2018 through August 2021, involved Pawan Passi, the former head of Morgan Stanley's equity syndicate desk. He collaborated with an unnamed subordinate to disclose nonpublic information regarding impending block trades to specific buy-side investors. These investors allegedly utilized the privileged information to establish short positions in stocks subject to the upcoming block trades, thereby mitigating Morgan Stanley's risk in purchasing such trades.

The SEC asserted that Morgan Stanley failed to enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information. The agency highlighted the firm's lapse in enforcing information barriers to prevent discussions of such information between the syndicate desk and the institutional equity division. The DOJ acknowledged Morgan Stanley's cooperation, noting that the firm's controls, although unsuccessful in uncovering the misconduct, were applied in good faith. The firm has since implemented remedial measures in 2022 to clarify policies governing communication with the buy-side ahead of block trades.

Pawan Passi, admitting his role in the scheme, reached a proposed deferred prosecution agreement with the DOJ. He faced a $250,000 fine from the SEC and certain supervisory bars for two years. Morgan Stanley entered into a three-year nonprosecution agreement with the U.S. Attorney’s Office for the Southern District of New York, requiring continued cooperation and information provision to the DOJ.

In response to the settlements, Morgan Stanley expressed satisfaction in resolving the investigations and voiced confidence in the enhancements made to its controls around block trading. The firm emphasized strengthened policies, procedures, training, and surveillance in this regard.

By fLEXI tEAM