Morgan Stanley warns of civil liability for block trading claims

Morgan Stanley has warned it faces potential civil liability over allegations that the Wall Street group drove stock prices down before executing the sale of large chunks of stock, the latest fallout from a US investigation into its block trading activity.

The disclosure in a quarterly report filed Wednesday comes after the bank admitted in February that the U.S. Securities and Exchange Commission had been reviewing the group’s block trading activities since 2019 and that the Justice Department had recently opened its own. investigation.

Morgan Stanley said in its report Wednesday that it faces potential civil liability for “claims that have been or may be asserted by participants in the block transaction or others” who may assert that they have been “harmed or disadvantaged” due, among other things, to the lower prices allegedly caused by the bank.

Morgan Stanley is so far aware of a claim by Disruptive Technology Solutions, which was an investor in US data analytics firm Palantir, a person briefed on the matter said.

Last month, The Wall Street Journal reported that Disruptive alleged Morgan Stanley leaked information ahead of the fund’s sale of more than $300 million of Palantir stock in February 2021, resulting in millions of dollars in losses.

Disruptive did not immediately respond to a request for comment on the complaint.

In block trades, banks such as Morgan Stanley are contracted to sell a large number of shares, either by the issuing company or by a large investor. Selling such a large amount of stock can often weigh on a company’s share price.

U.S. regulators have worried for decades that the process by which some banks have probed buyers for big stock sales is giving hedge funds and other clients an unfair opportunity to bet the stock price will plummet. “shorting” stocks.

Rival investment bank Goldman Sachs has reported Morgan Stanley to the Hong Kong financial regulator over a series of block trades, the Financial Times reported last month.

DoJ and SEC investigations have cast a shadow over Morgan Stanley’s equity franchise, which between 2018 and 2021 earned more U.S. block trading fees than any other bank.

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