January 25, 2024
Who may be interested: Registered Investment Companies, Investment Advisers, Broker-Dealers
Quick Take: The SEC settled charges against a firm and the former head of the firm’s equity syndicate desk, arising out of a multi-year fraud involving the disclosure of confidential information about block trades. The firm also settled SEC charges relating to its failure to enforce its policies concerning the misuse of material non-public information (MNPI) related to block trades.____________________________________________________________________________________________________________________________
According to the SEC’s orders, from June 2018 through August 2021, two members of the firm’s equity syndicate desk disclosed to some of the firm’s buy-side investors material non-public information (MNPI), specifically, details about impending block trades on which the firm had been invited to bid or was in the process of negotiating with the sellers. According to the orders, the syndicate desk made these potentially market moving disclosures with the understanding that the buy-side investors would short the stock before the block trade was executed, and, if the firm won the auction for the block trade, the buy-side investor would request and receive allocations from the block trade that they would use to cover their short positions. These disclosures by the members of the equity syndicate desk violated the block sellers’ expectations of—and, in certain instances, express requests for— confidentiality, and representations of confidentiality made by the equity syndicate desk.
As detailed by the SEC’s orders, the pre-positioning activity by the buy-side investors benefited the firm as it ensured that there would be a large buyer for at least a portion of the block trade, thereby lowering the firm’s sell side risk on the transaction, and giving the firm comfort to offer a more competitive bid.
According to the SEC’s orders, the firm also failed to enforce written policies and procedures reasonably designed, taking into consideration the nature of its business, to prevent the misuse of MNPI. Specifically, the firm failed to enforce information barriers to prevent MNPI involving block trades from being discussed by the equity syndicate desk, which sits on the private side of the firm, with the institutional equity division, which was on the public side of the firm.
As a result of the above conduct, the SEC’s order found that the firm violated Sections 10(b) and 15(g) of the Exchange Act and Rule 10b-5 thereunder. The head of the equity syndicate desk was found to have violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The firm was censured and ordered to cease and desist from the practices, and to pay approximately $138 million in disgorgement, $28 million in prejudgment interest, and an $83 million civil penalty. The head of the equity syndicate desk was also ordered to cease-and-desist, and pay a civil penalty of $250,000 and was barred from association with financial firms for at least one year, and barred from serving in a supervisory capacity for at least two years. The firm and the head of the equity syndicate desk also entered into a non-prosecution agreement and deferred prosecution agreement, respectively, in parallel actions brought by the U.S. Attorney’s Office for the Southern District of New York.
The SEC's order relating to the firm can be found here.
The SEC's order relating to the head of the firm's equity syndicate desk can be found here.
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The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm or its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
One Battery Park Plaza
New York, NY 10004
Phone (212) 574-1200
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901 K Street, NW
Washington, DC 20001
Phone (202) 737-8833
Fax (212) 480-8421