Morgan Stanley To Pay $249M Penalty In Block Trade Case: How Leaks Cost Blackstone, Oaktree Millions

Banking giant Morgan Stanley MS was fined $249 million on Jan. 12 for leaking information on trades by some of its top clients.

Bloomberg reports that the breach of trust cost companies including Blackstone BX and Oaktree Capital Management millions of dollars.

Federal prosecutors, along the with the Securities and Exchange Commission, accused Morgan Stanley of breaching the trust of its clients by leaking confidential information that it was then able to profit from at the expense of its clients.

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Confidentiality Request Breached

The investigation revealed that a top Blackstone executive reached out in March 2019 to Morgan Stanley’s Pawan Passi, then head of the bank’s U.S. equity syndicate desk, seeking help to exit a substantial real estate investment.

Despite Blackstone’s request for confidentiality, Passi was found to have tipped off a hedge fund which then shorted the company, Invitation Homes INVH, to the tune of $22 million, betting the shares would move lower.

Because this was a block trade, the sale of the stock would move the share price lower, allowing the hedge fund an almost certain profit.

The New York-based bank, alone, made $3.4 million from the trade after it purchased a block from Blackstone and then flipped them to the hedge fund to cover its short position, according to Bloomberg.

Passi, who was put on leave in 2021 as the SEC conducted its investigation, was barred from the banking industry for a year by the regulator.

Other companies to fall foul of Passi’s information leaks included Oaktree Capital Management and European private equity giant Cinven, Bloomberg reports.

In Oaktree’s case, it was looking to sell a large stake in Star Bulk Carriers SBLK, a Greek shipping company, and contacted Morgan Stanley. Again, Passi leaked the information to an investment company, which then began to bet against Star Bulk’s share price.

The following week, Morgan Stanley bought 10.6 million shares from Oaktree and sold two million shares to the investment company to cover its short position and netted $3.7 million in the process.

Block Trade Sensitivity

The case illustrates the sensitivity of block trading when exiting large positions that can potentially move the market.

The breach of trust cost both Blackstone and Oaktree profit on the sale of the shares, which moved lower as they were heavily shorted.

Morgan Stanley has reiterated that two employees who breached the bank’s policies were responsible for the misconduct. The bank has expressed confidence in its improved controls to prevent future occurrences.

The case sets a precedent, highlighting the importance of maintaining confidentiality and trust in investment banking, and the hefty penalty imposed on Morgan Stanley underscores the seriousness with which regulatory bodies view breaches of trust and misconduct.

Shares of Morgan Stanley, which also reported its fourth-quarter results on Tuesday, were down 4.1% to $85.97 on Tuesday.

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