Morgan Stanley’s Archegos Unwinding Sped Up Trading Probe

(Bloomberg) -- Morgan Stanley’s role in the unraveling of Bill Hwang’s family office breathed new life into a federal probe examining irregularities in Wall Street’s lucrative market for block trades.

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.

Federal investigators began focusing on the trades carried out by New York-based Morgan Stanley that occurred a day before a much broader fire sale of Archegos’s holdings led to more than $35 billion of value being wiped out from those shares -- the start of a broader rout in the equities that took hold in the weeks ahead.

That led to a wider inspection of multiple trades brought to market by Morgan Stanley, and whether its clients illegally profited from trading in advance of those transactions. That has also led to scrutiny of Pawan Passi, a senior executive at the bank who spoke frequently with clients about various block trades.

Morgan Stanley is now at the center of the probe that’s also ensnared a number of money managers and at least one other competitor, Goldman Sachs Group Inc. Authorities haven’t accused anyone of wrongdoing. 

Representatives for Morgan Stanley, the SEC and the Justice Department declined to comment.

Morgan Stanley dropped 1.8% to $101.55 at 11:27 a.m. in New York, making it the second-biggest decliner in the S&P 500 Financials Index. The bank’s shares have gained almost 34% in the past year.

Passi was put on leave in November and is among individuals facing scrutiny as part of the wider probe, according to people with knowledge of the matter. He ran Morgan Stanley’s U.S. equity syndicate desk and led the firm’s communications with investors for equity transactions. The unit executes initial public offerings, equity placements and block trades, as well as other types of deals.

In the wake of the rout tied to Archegos, people close to the family office had expressed concern about hasty actions taken by the banks and the nature of their conversations with clients that exacerbated the downward stock spiral that forced Hwang out of business.

Usually considered the king of equity trading on Wall Street, Morgan Stanley was the only U.S. bank to be stung by the Archegos collapse, which caused more than $10 billion of losses at banks around the world.

Morgan Stanley reported a $911 million loss after severing ties with Archegos. The bank compounded the mishap by failing to disclose the issue earlier, and then appearing dismissive of the problem on an earnings call, prominent banking analyst Mike Mayo said at the time.

Unlike some rivals, Morgan Stanley withheld disclosure of its loss for more than two weeks after getting out of all its holdings tied to Archegos. Banks struck up relationships with Archegos despite the legal taint linked to Hwang, who was previously accused of insider trading and, in 2012, pleaded guilty to wire fraud on behalf of his predecessor hedge fund, Tiger Asia Management.

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