More DOJ / SEC Investigations into BLOCK TRADING!!!!
Wonder How Much Abusive Short Selling BLOCK TRADING has damaged GNCP and Tens of Thousands of other Companies over the last decade alone?????
The King of Block Trades Is Entangled in a U.S. Probe of Morgan Stanley
Frank Fu, whose firm achieved a 76% return its first year, wields billions to help banks unload stock. The U.S. is examining those symbiotic relationships.
Block trading isone of the last bastions of old Wall Street, where big slugs of stock are sold through person-to-person negotiation, even cajoling, rather than electronic venues.
Block trading is one of the last bastions of old Wall Street, where big slugs of stock are sold through person-to-person negotiation, even cajoling, rather than electronic venues.Photographer: Michael Nagle/Bloomberg
ByKatherine Burton and Hema Parmar+Follow
March 18, 2022, 12:01 AM EDT
Updated onMarch 18, 2022, 8:19 AM EDT
When Frank Fu, a Cornell-educated engineer, opened his own hedge fund two years ago, he picked an unlikely niche for an introvert.
His CaaS Capital Management would focus on block trading, one of the last bastions of old Wall Street, where big slugs of stock are sold through person-to-person negotiation, even cajoling, rather than electronic venues. Many practitioners are bro-y -- the type who played college football. For Friday happy hours, Fu’s colleagues unzip their CaaS puffer vests and break out chess boards in a conference room.
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Yet Fu, 39, soon managed to establish close ties with investment banks including Morgan Stanley, the juggernaut of the equities world. His pitch: CaaS would “partner” with them, positioning itself for preferential treatment. Prospective investors say CaaS has boasted to them of quickly becoming one of the biggest U.S. funds dedicated to block trading, getting a first look at deals and gaining entry to virtually every IPO in the country. In the firm’s first full year Fu posted a jaw-dropping 76% return.
Now, Fu and one of his key contacts at Morgan Stanley, Pawan Passi, are said to be among more than a dozen industry executives whose communications are being scrutinized in a sweeping U.S. probe into how Wall Street firms handle big trades. Investigators are examining, among other things, whether banks improperly tipped hedge funds to pending sales big enough to move markets.
“CaaS has earned a reputation in the market as the firm that receives an early, if not first, call.”
While a coterie of firms has said they, too, help banks with block trades, none has been more effusive than CaaS in making that its raison d’etre. Its name is an acronym for “Capital as a Service.” The firm had just over $650 million in assets under management at the end of February, but it’s been able to leverage that up, wielding somewhere around $5 billion in firepower so it’s able to pounce if banks need to unload stock.
The probe may test whether Morgan Stanley or others involved in such symbiotic relationships crossed legal lines.
Investigators at the Department of Justice and the Securities and Exchange Commission, which first started examining block trading in 2018, haven’t accused anyone of wrongdoing. Morgan Stanley placed Passi, one of its top executives on block trades, on administrative leave in November and in a regulatory filing last month acknowledged it faces Justice Department and SEC inquiries. Spokespeople for the bank and U.S. prosecutors declined to comment for this story, as did a representative for CaaS and Fu.
Anticipating Flows
Though Wall Street’s boisterous trading pits have long been overtaken by the hum of electronic venues, the art of trading blocks of stock still endures in Manhattan’s towers. Indeed, its importance has swelled in recent years, as young companies have come to rely on rounds of funding from venture capital and private equity firms.
Morgan Stanley, in particular, has built up a franchise helping Silicon Valley startups carry out those funding rounds. So when companies eventually do hold an initial public offering, they may have a long list of early stakeholders still holding large amounts of stock. Morgan Stanley can earn extra fees helping them cash out, offering shares to investment firms with desks handling blocks, as well as specialized shops such as CaaS.
Morgan Stanley Headquarters Ahead Of Earnings Figures
Fu established close ties with investment banks including Morgan Stanley.Photographer: Victor J. Blue/Bloomberg
Those dealings can tread into gray legal areas.
One way money managers can get an edge is by anticipating flows. Say a banker is angling to help a big shareholder reduce its stake. To pitch a competitive price, the banker might call around to money managers to gauge their theoretical appetite. Market participants say that some traders have been known to bet against shares after getting those calls, assuming a deluge of stock will soon hit the market and push down the price. That short-selling also depresses the price and raises the question of whether the trader acted on material non-public information, a key ingredient of insider trading.
“The definition of material nonpublic information is pretty broad,” and can be murky, said Dan Viola, a partner overseeing law firm Sadis & Goldberg’s regulatory and compliance practice. “Funds shorting after such calls are taking an aggressive stance. Regulators appear to be concerned about a banker giving confidential information to preferred customers at the expense of the person who is selling the big block.”
Still, bankers might find some advantage in letting traders know blocks are coming. If those traders short the stock, they might be more amenable to buying a piece of the block at a thin discount. The government is looking into whether such trades took place.
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