(Bloomberg) - A former Morgan Stanley banker who was punished in the block-trading probe that rattled Wall Street joined one of the firms that was the recipient of confidential information he leaked.
Pawan Passi was hired by Frank Fu’s CaaS Capital Management, according to people familiar with the matter. CaaS made its name partnering with banks as they sought buyers for block trades, becoming one of the biggest US funds dedicated to buying big chunks of stocks.
A yearslong investigation into block trading that reverberated across the industry culminated in January after Morgan Stanley agreed to pay $249 million to the Justice Department and the Securities and Exchange Commission. Passi also agreed to a monetary fine and a one-year ban from the industry as part of his pact with the SEC.
He’s able to work at CaaS because three weeks ago the firm terminated its registration with the SEC, according to a regulatory filing.
Bloomberg has previously reported Fu’s CaaS Capital was among a handful of unnamed firms described in legal documents that got leaks on upcoming stock trades. Morgan Stanley employees doled out the information, with the expectation that hedge funds would short the stocks and position themselves to buy parts of a block once it hit the market.
Prosecutors haven’t accused any buy-side participants that allegedly received the tips of any wrongdoing.
CaaS Capital’s Fu didn’t answer a phone call and text seeking comment on the hire. Passi responded to a call at CaaS but declined to comment.
Passi’s agreement with the SEC enforced a 12-month ban from the brokerage business. The deal also prevented him from working for an investment adviser for the same amount of time.
CaaS used to call itself a “global investment manager” but now says it’s a “single family office,” according to its website. That allows it to give up its status as an investment adviser because it no longer has outside clients.
Passi also entered into a six month deferred-prosecution agreement with the DOJ and pleaded not guilty to securities fraud to resolve the probe that cost him his career at Morgan Stanley. The DOJ didn’t impose any monetary penalty, citing the roughly $7.4 million in forfeited compensation from his former employer due to the alleged conduct.
Trading Rainmaker
DOJ findings showed the agency had obtained recordings of conversations between Passi and Fu spanning multiple months.
The two got to know each other around 2016 when Fu was working at Laurion Capital Management, where he had come to be seen as a rainmaker. During Fu’s last five years at Laurion, he made more than $40 million, according to a lawsuit filed over the terms of his exit in 2019.
When Fu, a Shanghai-born Cornell-educated engineer, opened his own hedge fund, he picked an unlikely niche. CaaS focused on block trading, one of the last bastions of old Wall Street, where big slugs of stock are sold through person-to-person negotiation.
Fu set up CaaS, which is short for “capital as a service,” with early backing from BlackRock Inc. and New Holland Capital. In its first full year, the firm posted a 76% return.
His team eschewed the typical hedge fund stereotypes. For Friday happy hours, Fu’s colleagues were more like to be seen unzipping their CaaS puffer vests and playing chess in the conference room.
Read More: Block-Trading Whale Entangled in U.S. Probe of Morgan Stanley
After Archegos Capital Management collapsed in March 2021, Fu’s CaaS was a helpful partner for the lenders unwinding Bill Hwang’s highly levered portfolio. A regulatory filing at the end of the month showed CaaS scooped up more than $440 million of the stocks that Archegos had been betting on.
At the end of February 2022, CaaS had just over $650 million in assets under management, but it had been able to leverage that up, wielding somewhere around $5 billion in firepower. “CaaS has earned a reputation in the market as the firm that receives an early, if not first, call,” the firm wrote in one of its marketing presentations.
With the termination of its registration with the SEC, CaaS has laid out new goals.
“Our overarching objective is to cultivate mutually advantageous relationships among all our stakeholders,” the firm says on its revamped website. “All while remaining true to our family’s core values of effecting positive change in the world through our investment endeavors.”
By Sridhar Natarajan, Ava Benny-Morrison and Katherine Burton
