Senior Morgan Stanley Banker Reportedly Key Player In "Block Trading" Probe

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by Tyler Durden
Wednesday, Feb 16, 2022 - 11:00 PM

When the Wall Street Journal first reported the latest leak about an SEC and DOJ investigation into an alleged "block-trading" cartel that reportedly began a few years back - either in 2018 or in 2019, depending on which report you to believe - it was only the latest leaked update about a series of seemingly related SEC probes: the investigations by turn involve hedge funds, including big-name short-sellers, and big banks (who else: Morgan Stanley and Goldman). There was talk of "short-selling cabals" and illicit "block trades" that until very recently were widely regarded by Wall Street as a acceptable part of doing business. Or at least a "grey area".

Well, Bloomberg has furnished one of the latest updates on this ongoing saga, reporting early Wednesday that at least one senior Morgan Stanley executive has become enmeshed in the government's investigation into the block trades, and more specifically, whether the bankers may have tipped certain hedge fund clients of impending block trades before they were actually brought to market.

Keep in mind, when government prosecutors leak a banker's name like this, they're usually doing it because they want him or her to cooperate. Or at least that's how it played out with Goldman's TIm Leissner during the1MDB probe, an investigation that just happens to have newfound relevance given the start of the trial of a more junior Goldman banker who is taking most of the criminal rap for the bank. Goldman ended up pleading guilty to criminal charges, but Leissner struck a well-publicized immunity deal early.

Bloomberg's sources claim that Pawan Passi, a senior banker who ran Morgan Stanley’s US equity syndicate desk while some of the (again, alleged) misbehavior was taking place. Keep in mind, according to Bloomberg's description, these 'alleged' business practices (at this point, the allegations have mostly been communicated to the public in the form of anonymously sourced leaks) were only recently Wall Street "best practices" until fairly recently (presumably until right around the time the investigations started, or soon thereafter).

But we digress. Here's Bloomberg:

Pawan Passi, who ran Morgan Stanley’s U.S. equity syndicate desk and led the firm’s communications with investors for equity transactions, is among individuals whose activities are facing scrutiny, the people said, asking not to be identified describing the confidential inquiry. Bloomberg reported in November that the company had put Passi on leave.

Morgan Stanley is at the center of a sprawling investigation by the Securities and Exchange Commission and Justice Department, which are digging into how bankers work with hedge funds to privately carry out stock sales big enough to send market prices tumbling. The probe, which emerged in press reports earlier this week, is gathering information on the activities of a slate of money managers and at least one other competitor, Goldman Sachs Group Inc. Authorities haven’t accused anyone of wrongdoing.

To guard itself against skeptical readers, Bloomberg named three reporters in the story's byline and a legion of others who received taglines for "reporting" related to the story. In all likelihood, given the nature of the information, this leak is likely coming from the SEC.

The report also dropped a few other high-profile Wall Street "names" who are reportedly involved in the investigation.

Officials have asked key Wall Street firms to preserve their communications with a roster of fund executives, including Islet Management’s Joseph Samuels, the people said. Investigators have sought similar information on a former employee at Segantii Capital Management, as well as people at other firms, some of the people said.

Representatives for Islet founder Samuels and Segantii had no immediate comment.

But why does the SEC care about these block trades? We'll allow Bloomberg to explain:

Highly secretive, market moving and potentially treacherous -- block trading has been one of Wall Street’s most delicate arts since it emerged as a major business line more than a half century ago. Legendary Goldman Sachs dealmaker Gus Levy pioneered the business in the 1960s, helping position his firm to become the trading powerhouse that it is today.

Yet Morgan Stanley, with deep ties to Silicon Valley ventures and legions of hedge fund clients eager to bet on their future, has wrested away the lead in recent years. It commanded 26% of the market for block trades involving U.S. stocks in 2021, according to data compiled by Dealogic -- ranking No. 1 ahead of Goldman for a second straight year.

The images of highly exclusive, after-hours trading conjured up by Bloomberg in its report brings to mind images of bankers entertaining "clients" at strip clubs, and in other illicit, male-oriented gatherings that were a distinctive feature of the Wall Street of pre-financial crisis lore. That's exactly the type of behavior that the SEC has long justified its existence by reining in, so when the next financial collapse rolls around, they can at least pretend to the American public like they actually did some "regulating" of Wall Street's excesses during their all-too-brief time in power.

Not to be outdone, WSJ has also published another scoop of this own, which we have covered here, about the other side of this weird new tandem investigation - a probe into "spoofing" and other nefarious tactics used by some short sellers. The government in that case is insinuating that some short sellers have "conspired" to share market-moving research early.

And additionally, hours after Wednesday's Bloomberg story, another report hit, alleging - for the first time - that the Archegos block trades seemingly played some role in the probe, which would be quite shocking, since those block trades quite literally took Wall Street by surprise when they first landed after a hastily brokered deal between senior bankers at half a dozen megabanks gave way thanks to - yet again - Morgan Stanley (and Goldman Sachs).


Bloomberg's "sources" now expect us to believe that their investigation into Wall Street "block trading" culture had already been underway for a couple or years before the Archegos blowup, which facilitated some of Wall Street's most visible block trades (trades that Zero Hedge was among the first to report on). T

According to the "US authorities" and "regulators" cited by Bloomberg, the collapse of Bill Hwang's massively leveraged family office - which has, according to media reports, collapsed - has intersected with "a number" of investigations.

U.S. authorities ramped up their investigation into whether big banks and their hedge fund clients broke rules when privately negotiating large stock sales after the blowup at Archegos Capital Management, according to people with knowledge of the matter.

Regulators had already been scrutinizing block trades for years when Archegos shined a fresh spotlight on the market: Stocks Hwang had made massive bets on started tanking last March, prompting banks to unload tens of billions of dollars of his holdings through a spree of huge sales. Morgan Stanley had amassed one of the largest exposures, and was one of the first to dump positions that eventually led to the flame-out of the family office. With a new hook, authorities soon began poring through the carnage.

The spectacular rise and sudden collapse of Hwang’s fund has set off a number of inquiries into issues from market manipulation to collusion among banks. The downfall also helped advance a block-trading probe that started as early as 2018. Last year, investigators from the Securities and Exchange Commission and U.S. Department of Justice stepped up their demands for information.

Apparently, Twitter is more willing to collaborate with government censors as a check on its errant users, courtesy of the LIbertarian party of New Hampshire.

For the Morgan Stanley bankers, now comes the less-fun part of working in finance: facing down federal prosecutors with your high-priced defense attorney.