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U.S. SEC is probing Wall Street trades in large blocks of shares

[February 16, 2022] By Chris Prentice

WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission (SEC) is probing whether financial executives may have broken the rules by tipping off hedge funds ahead of large sales of shares, known as "block trades," according to a source with knowledge of the matter.

The seal of the U.S. Securities and Exchange Commission hangs on the wall at SEC headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst

The Wall Street Journal first reported the probe on Monday. The newspaper said the SEC was investigating Morgan Stanley and Goldman Sachs, along with the U.S. Department of Justice.

All four parties declined to comment.

Broker-dealers frequently buy and sell blocks of shares, either on behalf of clients or as part of a hedging strategy, which are large enough to move the company's share price.

Block trading tends to increase during times of volatility as institutional investors rebalance their portfolios.

Information on such share sales ahead of time could be extremely valuable. Inappropriately sharing material, nonpublic information could run afoul of U.S. laws, the source said. Firms could also face scrutiny if they fail to have processes in place to prevent misuse of information.

The SEC has sent subpoenas to several hedge funds and banks, demanding trading records and information about investors' communication with bankers, according to the WSJ report, which also said regulators had begun looking into irregularities related to block trades since at least 2019.

Investigators are probing whether bankers improperly alerted favored clients ahead of public disclosure of trades and if such information benefited the funds, some of which act as "liquidity providers" to Wall Street firms, the report said.

(Reporting by Chris Prentice; Additional reporting by John McCrank in New York; Editing by Michelle Price and Jonathan Oatis)


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