The Blubber

Citadel was among the hedge funds that got Morgan Stanley’s, $MS, block-trading leaks, per Bloomberg.

Morgan Stanley gave hedge funds advance as clients planned to sell enough to move market prices.

Morgan Stanley paid $249 million to settle the probe.


An insider at Ken Griffin’s sizable hedge fund was among several executives referred to anonymously in Morgan Stanley’s settlements with authorities, according to sources familiar with the matter.

In addition to Citadel, individuals at block-trading specialist CaaS Capital Management, Segantii Capital Management, and Evolution Capital Management were recipients of stock information outlined in legal documents, although their names were not disclosed, the sources said, speaking on condition of anonymity to discuss confidential aspects of the investigation.

Prosecutors have not accused any recipients of the stock tips of wrongdoing.

The investigation criticized Morgan Stanley for alerting hedge funds in advance when clients were planning to sell significant blocks of stock that could impact market prices. The Department of Justice and the Securities and Exchange Commission alleged that bank employees provided this information with the understanding that hedge funds would short the stocks and position themselves to purchase parts of the block when it became available on the market.

The involvement of these firms illustrates the extent of the information flow as Morgan Stanley employees breached client confidentiality to bolster the bank's standing. While the bank's close relationships with certain specialized firms have been previously examined, Citadel's connections to the case were less known.

Not every leak resulted in hedge fund managers trading before blocks of stock were sold. In some instances, the sellers canceled their plans, as was the case with two trades shared with Citadel. Legal experts in the industry argued that if firms did engage in trading, they did not violate any laws because they had not entered into confidentiality agreements with the bank.

"Hedge funds that received information from a Morgan Stanley executive were entitled to assume he was following his firm’s rules," said Cristie Ford, a former Davis Polk lawyer now teaching at the University of British Columbia. She noted that interactions in the industry often involve rumors, hunches, and hypothetical questions from equity desks.

Morgan Stanley paid a $249 million penalty to settle the investigation. Pawan Passi, who oversaw the bank’s US equity syndicate desk before being placed on leave in 2021, was banned from the industry for a year by the SEC.

Representatives for the bank and the hedge funds declined to comment or did not respond to inquiries.

Those selling blocks of stock have long expressed frustration over price declines just before executing a trade, reducing their proceeds. Morgan Stanley, a major player in block trading, drew criticism from rival firms envious of its ability to drive down prices ahead of its sales, a phenomenon dubbed "the Morgan Stanley fade."

One proposed trade was shared with two hedge funds, including Citadel. However, the seller grew suspicious as market prices began to decline, prompting them to alert the head of Morgan Stanley’s desk about the "fishy" stock performance, according to the Justice Department. The customer ultimately postponed plans to sell stock that month. Citadel had not initiated shorting of that stock—radio station operator iHeartMedia Inc.—prior to the proposed trade falling through, according to two sources.

In another instance, a Morgan Stanley banker informed a Citadel trader about discussions with a potential block seller. The Citadel trader then detailed his existing short position in the stock and received assurances that when the sale proceeded, he would receive an allocation sufficient to cover his bearish bet and close out the trade. However, that sale also did not materialize, according to one of the sources.

The Citadel trader departed the firm last year, but his exit was unrelated to the investigation, two sources said.