Regulators probe block trading at Morgan Stanley, Goldman, other Wall Street firms
SEC, Justice Department investigate large share sales, communications between banks, hedge funds
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Federal investigators are probing the business of block trading on Wall Street, examining whether bankers may have improperly tipped hedge-fund clients in advance of large share sales, according to people familiar with the situation.
The Securities and Exchange Commission has sent subpoenas to firms including Morgan Stanley and Goldman Sachs Group Inc. as well as several hedge funds, asking for trading records and information about the investors’ communications with bankers, some of the people said. The Justice Department also is investigating the matter, some of the people said.
FILE PHOTO: A screen shows the Dow Jones Industrial Average on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., January 26, 2022.
The issuance of subpoenas doesn’t mean charges will be brought against any of the firms or individuals whose activities are being scrutinized.
Regulators have been looking into irregularities around block trades since at least 2019, when the SEC requested records from several large banks, people familiar with the matter said.
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Investigators are looking at whether bankers improperly alerted favored clients to the sales before they were publicly disclosed and whether the funds benefited from the information—for example by shorting the shares in question. (In a short sale, an investor sells borrowed stock in hopes of buying it back at a lower price later and pocketing the difference.)
Shares of companies selling stock often fall because of an increase in supply hitting the market—and they do so frequently in the hours before a big block is sold, a phenomenon that has long raised questions on Wall Street.
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Some of the funds that have received subpoenas act as "liquidity providers" to Wall Street firms, according to some of the people, standing by to purchase slugs of stock or other securities, including those that have few interested buyers.
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