Damian Williams, the United States Attorney for the Southern District of New York, and James Smith, the Assistant Director in Charge of the New York Field Office of the Federal Bureau of Investigation (“FBI”), announced that Morgan Stanley & Co. entered into a non-prosecution agreement (the “NPA”) with the U.S. Attorney’s Office and agreed to pay more than $153 million to the United States for making false statements in connection with the sale of certain “block trades” (the “Relevant Blocks”) from 2018 through August 2021. The NPA requires MORGAN STANLEY to forfeit $72,515,141 to the United States, representing its profits from the Relevant Blocks; to pay $64,016,082 in restitution, representing the harm it caused to the sellers of the Relevant Blocks; and to pay a $16,900,000 fine. The NPA requires MORGAN STANLEY to continue to cooperate with and provide information to the United States for at least three years from the date of the agreement. In the event that MORGAN STANLEY violates the NPA, the U.S. Attorney’s Office may prosecute MORGAN STANLEY.
The corporate action reflects a careful weighing of factors relevant to the appropriate corporate resolution. The NPA recognizes that while the serious conduct to which MORGAN STANLEY has admitted was uncovered by the Government and was not voluntarily self-disclosed, (i) MORGAN STANLEY has provided extraordinary cooperation with this Office’s investigation; (ii) the investigation has not uncovered evidence of corporate management’s complicity in or knowledge of the wrongdoing; (iii) MORGAN STANLEY’s controls, while ultimately unsuccessful in uncovering the misconduct, were designed in part to detect misconduct in the block trades business and were applied in good faith; (iv) in 2022, MORGAN STANLEY implemented a series of remedial measures to create clearer policies governing its ability to communicate with the buy-side in advance of block trades and trained its employees on those policies; (v) MORGAN STANLEY has no prior criminal history of any kind, including no prior NPA or DPA; and (vi) MORGAN STANLEY has accepted full responsibility for its conduct and agreed to resolve with the U.S. Securities and Exchange Commission (“SEC”).
U.S. Attorney Williams also announced that PAWAN PASSI, the MORGAN STANLEY employee that supervised block trades during the relevant time, entered into a deferred prosecution agreement (the “DPA”) with the U.S. Attorney’s Office, pending court approval. In the DPA, PASSI admitted that, from 2018 through August 2021, he promised sellers of certain equity blocks that MORGAN STANLEY would keep information concerning their potential sales confidential, knowing that he would disclose that information to buy-side investors and that those investors would use the information to trade in advance of the block sales. The DPA provides that criminal prosecution of PASSI will be deferred during a period in which PASSI must demonstrate good behavior and fulfill the terms of the DPA, in which case PASSI will not be further prosecuted criminally. The case has been assigned to U.S. District Judge Analisa Torres, and a court appearance has been scheduled before U.S. Magistrate Judge Robyn F. Tarnofsky today at 11:00 a.m.
U.S. Attorney Damian Williams said: “Morgan Stanley, through the supervisor of its block trades business, Pawan Passi, deceived block sellers by promising confidentiality knowing that they would turn around and share that information with others to use to trade. As the Statement of Facts makes clear, the Government’s investigation uncovered the misconduct at Morgan Stanley. This fact serves as a reminder that we are watching. And we will continue to use all the tools at our disposal to root out fraud in our financial markets. Today’s actions show too that while we continue to act aggressively to enforce our nation’s laws, we evaluate each case and each prosecution on its facts and circumstances and will, where appropriate, consider alternatives to criminal prosecution, including declination, an NPA or DPA, whether for a corporation or an individual. Here, with respect to Morgan Stanley, while many factors weighed in Morgan Stanley’s favor, including extraordinary cooperation and remediation, the misconduct was not uncovered and voluntarily disclosed. Morgan Stanley now must comply with the terms of the NPA for the next three years and have a criminal resolution with the U.S. Attorney’s Office on its permanent record.”
Assistant Director in Charge James Smith said: “The integrity of our financial markets requires a level playing field, and when individuals and institutions intentionally tip the scales there must be consequences. Morgan Stanley and Mr. Passi, as admitted in the agreements, utilized confidential information regarding block trades to benefit themselves. The FBI, in order to maintain the public’s trust in our economic system, will hold any individual or financial entity engaging in complex financial crimes accountable in the criminal justice system.”
As part of the NPA, MORGAN STANLEY agreed to a statement of facts describing the deceptive conduct and the remedial measures that it took in response to learning of that conduct.
