Morgan Stanley relationships across Wall Street snared in probe

NEW YORK (BLOOMBERG) - Ever since his arrival after university in 2004, Mr Pawan Passi has worked the phones inside Morgan Stanley, rising to become a chief communicator with investors buying and selling big blocks of stock, a business the bank dominates on Wall Street.

Then in November last year, his chair suddenly went empty at Morgan Stanley's headquarters overlooking Times Square, and the whispers began spreading. The bank had put Mr Passi on leave. The feds were poking around.

Indeed, Morgan Stanley and Mr Passi are intertwined in a sprawling United States probe into whether bankers are improperly tipping off investors to stock sales large enough to send prices swinging, according to people with knowledge of the inquiries.

Block trading is one of a few Wall Street businesses where relationships still drive the flow of deals - and now the ties spanning a wide range of firms are getting picked apart by investigators. No one has been accused of wrongdoing.

Mr Passi's frequent phone contacts and some of Morgan Stanley's key clients are among a roster of more than a dozen executives at other investment firms and banks whose communications are being scooped up by the US Justice Department for scrutiny, according to the people.

In some cases, the authorities are seeking access to online chats, mobile phone texts, e-mails and messages sent by apps, the people said.

The inquiries from investigators show they are interested, in part, in whether any money managers placed well-timed bets before block trades that have the power to drive down prices, according to the people. Even then, it is unclear who, if anyone, might be suspected of leaking any material non-public information or acting on it.

Inside Morgan Stanley, Mr Passi is described as well liked and usually low key - not the archetypal Wall Street hothead. The 38-year-old is a lifer at the company, joining in the UK, transferring to the US in 2008 and even meeting his wife at the bank.

The Securities and Exchange Commission, which is conducting its own parallel inquiry, has been concerned for years about potential abuses in the highly secretive world of block trading.

But executives overseeing block trading privately express doubts that the authorities will find anything amiss. Talks with investors about block trades often occur in legal gray areas, with bankers routinely canvasing prospective buyers about their hypothetical interest in specific stocks but taking care not to leak deals that are actually in the works.

Among investors, complaints have long festered.

Many fund managers grouse that they may be missing out on stock allocations in popular initial public offerings (IPOs) because bankers are more focused on cultivating relationships with longer-term investors or with other clients willing to buy into block trades.

"The banks might save the best opportunities for their best revenue-generating clients," said Typhon's Koutoulas, who does not participate in block trades and wants banks to find an alternative method for parcelling out hot IPOs. "If you're a hedge fund and you have the right banking relationship, you may get favourable allocation."

Sellers offloading blocks have long expressed frustrations about prices that slip just before the trade is executed, which reduces their proceeds. As the biggest block trader, Morgan Stanley is a favorite topic of scorn by envious rivals, where a declining stock price before a deal is sometimes derided as "the Morgan Stanley fade".