Morgan Stanley in Talks with US Regulators to Settle Block Trading Probe

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Morgan Stanley is in discussions with US prosecutors and regulators to settle an investigation into its block trading practices, according to the financial institution.

The inquiry centres on whether employees at the firm shared or utilised information related to impending block transactions in breach of securities regulations.

The company confirmed that two bankers who had been suspended in relation to the matter had been dismissed due to allegations about their communications regarding pending block trades and client activity.

The probe, which was revealed by Morgan Stanley last year, carries the potential for civil liability over allegations that the bank caused stock prices to fall before completing a block trade. Both the SEC and the Justice Department declined to comment on the investigation.

Wall Street is monitoring the investigation as prosecutors scrutinise how banks work with hedge funds and other buyers to privately conduct stock sales large enough to shift prices.

Company founders and other significant stakeholders engage bankers to help them discretely offload large blocks of stock without adversely affecting prices.

Banks frequently partner with hedge funds willing to acquire a bundle of equities on short notice.

However, the conversations that take place regarding these transactions can sometimes move into legal grey areas.

If sellers witness prices dip just before deals are finalised, they may suspect information has leaked.

According to Bloomberg, the Justice Department has sought communications involving over a dozen professionals at Wall Street companies, including Morgan Stanley and some of its leading clients.

In December, Pawan Passi, who led Morgan Stanley’s US equity syndicate desk and the bank’s communications with investors for equity transactions, and Charles Leisure, an underling, both departed the bank.

They had initially handed in their resignations, but their notice period was curtailed and their departure hastened over their unwillingness to work closely with the bank throughout the investigation, according to individuals familiar with the situation who spoke to Bloomberg.

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