More Senior Bankers Implicated In Leaks About Federal “Block Trading” Probe

Following reports earlier this week that several big-name short sellers had their offices raided by federal agents as part of an SEC/DoJ investigation into “spoofing,””scalping” and illegal short-selling, more senior bankers are being outed as targets in the other ongoing SEC/DoJ probe targeting big name banks and hedge funds: that is, the investigation into “block trading” which – as it turns out – does involve the market-moving block trades that resulted from the Archegos collapse.

A team of Bloomberg reporters revealed on Friday that in addition to Morgan Stanley executive Pawan Passi, a number of other senior bankers who were found to be among Passi’s “frequent contacts” are also having their communications examined with a fine-toothed comb by a team of federal investigators. They include the following:

The list of people whose communications are being sought ranges from executives at prominent Wall Street hedge funds, such as Andrew Liebeskind at Citadel’s Surveyor Capital and Jon Dorfman at Element Capital Management, to money managers at smaller firms focusing on block trades, including executives at CaaS Capital Management and Islet Management, and a former employee at Segantii Capital Management, the people said.

Bankers include Felipe Portillo, a risk executive within Credit Suisse Group AG’s equity capital markets group, Michael Daum, a partner at Goldman Sachs Group Inc., and Michael Lewis, the head of U.S. equities cash trading at Barclays Plc, the people said. Lewis worked at Morgan Stanley until 2018.

According to BBG, being named here doesn’t mean these people are “central” to the investigation – just that their names have “come up”. Investigators are focusing on finding evidence of any particularly “well-timed” block trades

The inquiries from investigators show they’re 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’s unclear who, if anyone, might be suspected of leaking any material non-public information or acting on it.

Inside Morgan Stanley, Passi – who has apparently been on leave since late last year – is described by colleagues as “well-liked” and “low key”. Several of Passi’s colleagues at MS have also been ensnared in the probe. Their names are:

Authorities have been going over recordings of his phone calls, Bloomberg reported earlier this week. They’re also scrutinizing communications involving at least three of his colleagues at Morgan Stanley: Evan Damast, its global head of equity and fixed-income syndicate, John Paci, a senior equities trading executive, and Charles Leisure on the syndicate desk. They and Passi haven’t responded to messages seeking comment.

BBG adds that the SEC (which is conducting its own “parallel” investigation along with the DoJ) has long been concerned about “block trading”, one of the last businesses on Wall Street that’s dominated by “relationships”. Apparently, investors have long complained about the practice, according to BBG.

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 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.

As one investor explains…

“The banks might save the best opportunities for their best revenue-generating clients,” said Typhon’s Koutoulas, who doesn’t participate in block trades and wants banks to find an alternative method for parceling out hot IPOs. “If you’re a hedge fund and you have the right banking relationship, you may get favorable allocation.”

Morgan Stanley has long dominated the business of block trading on Wall Street, which is perhaps one reason why Morgan Stanley (and also its primary rival, Goldman Sachs, another major player) were more or less unscathed by the Archegos collapse (while Credit Suisse and Nomura were saddled with billions of dollars in losses).

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