The Securities and Exchange Commission (SEC) recently ruled that stocks can be sold to the public in an open sale, but is this true? Let’s take a look at who can sell their company shares.
Something odd has been going on on Wall Street for years.
The price decreased before a large shareholder could follow out his intentions to sell a large amount of shares. It seemed as though other investors had foreseen what was about to happen.
It happened when Bain Capital sold stock in trendy parka maker Canada Goose Holdings Inc., when 3G Capital sold Kraft Heinz Co. stock, when Apollo Global Management Inc. sold Norwegian Cruise Line Holdings Ltd. stock, and when Alaska’s state oil fund trimmed its stake in an artificial-intelligence software firm.
The selling stockholders and the investment banks they engage to execute the deals are meant to keep these transactions, known as block trades, a secret. However, according to a Wall Street Journal examination of almost 400 such deals over three years, information about the sales is frequently leaked ahead of time, a possibly criminal tactic that costs sellers millions of dollars while benefiting banks and hedge-fund clients.
The Journal’s examination of 393 block transactions between 2018 and 2021 showed that, after adjusting for peer company performance, the share price fell 58 percent of the time in the trading session immediately preceding the trade. The sellers would have gotten $382 million more if the stocks had performed in accordance with the benchmark, or approximately $1.4 million per sale, based on the 268 trades for which the Journal was able to calculate how much the banks paid.
A few of these may be attributed to ill luck or an unfavorable headline. However, the recurrent trend of equities decreasing in the days leading up to large insider transactions shows a larger issue: Information that should be kept private is leaking.
Low-cost selling
According to a Wall Street Journal research, Morgan Stanley conducted the most block transactions during a three-year period, and the equities in question lagged peers on the day of the sell by the greatest amount on a middle-of-the-road basis
On the day of each of their birthdays, their birthdays, their birthdays, their birthdays, their birthdays,
Morgan Stanley is a financial services firm.
There were 174 block transactions in total.
the stock that was sold
underperformed its expectations expectations expectations expectations expectations
by a benchmark index
0.7% of the population
on a middle-of-the-road basis
On the day of each of their birthdays, their birthdays, their birthdays, their birthdays, their birthdays,
Morgan Stanley is a financial services firm.
There were 174 block transactions in total.
the stock that was sold
underperformed its expectations expectations expectations expectations expectations
by a benchmark index
0.7% of the population
on a middle-of-the-road basis
On the day of each of their birthdays, their birthdays, their birthdays, their birthdays, their birthdays,
Morgan Stanley is a financial services firm.
There were 174 block transactions in total.
the stock that was sold
underperformed its expectations expectations expectations expectations expectations
by a benchmark index
0.7% of the population
on a middle-of-the-road basis
On the day of each of their birthdays, their birthdays, their birthdays, their birthdays, their birthdays,
Morgan Stanley is a financial services firm.
There were 174 block transactions in total.
the stock that was sold
underperformed its expectations expectations expectations expectations expectations
by a benchmark index
0.7% of the population
on a middle-of-the-road basis
On the day of each of their birthdays, their birthdays, their birthdays, their birthdays, their birthdays,
Morgan Stanley is a financial services firm.
There were 174 block transactions in total.
the stock that was sold
underperformed its expectations expectations expectations expectations expectations
by a benchmark index
0.7% of the population
on a middle-of-the-road basis
This trend is currently the subject of a government inquiry investigating whether banks inform favored customers about impending block transactions. According to the Wall Street Journal, the Securities and Exchange Commission has requested trade data and electronic conversations from a number of large banks and hedge funds, and the US Justice Department is conducting its own investigation.
For the time being, the probe seems to be centered on Morgan Stanley, MS -1.98 percent, which has dominated block trading in recent years. Later in February, the business revealed that it has been responding to Justice Department information demands since the summer. Pawan Passi, a senior employee in charge of block trading, was placed on leave in November. Mr. Passi’s representative at Morgan Stanley refused to comment, and repeated efforts to contact him were futile.
According to the Journal, Goldman Sachs Group Inc. has also received demands from authorities.
According to bankers and investors, the inquiry, along with a wider market slump, has cooled the major business of block trading in recent months.
According to the Journal’s data, when Morgan Stanley made a block transaction on its own, the median stock lagged its peers by 0.7 percentage point in the trading session before the deal, implying that half of the stocks did worse. That was the poorest performance of any of the major banks involved in block trading. According to the data, the median underperformance of Credit Suisse Group AG’s agreements was 0.4 percentage point. Goldman Sachs and Barclays PLC performed median deals that were approximately in line with the market.
The median stock lags by 0.2 percentage point across all institutions.
Morgan Stanley, Credit Suisse, Goldman Sachs, and Barclays did not respond to requests for comment. The other firms and investors named in this piece either didn’t reply or refused to comment.
In recent years, Morgan Stanley has dominated the block trading market.
LUCAS JACKSON/REUTERS/LUCAS JACKSON/REUTERS/LUCAS JACKSON/REUTERS/
Leaks may originate from a variety of places. Companies often contact many banks to bid on block transactions, allowing the chance that the information was leaked by someone other than the company winner.
There isn’t a full list of block trades available to the public. Some are registered with the Securities and Exchange Commission (SEC). Others may be found in less well-known company filings. Many people don’t leave any trace at all. The Journal’s study relied on databases kept by research companies IPO Boutique and Dealogic, as well as information from market players, and linked specifics of those deals to securities filings when feasible, though the list is likely incomplete.
Insiders who wish to sell a large amount of shares have a problem: posting the order on a public market would almost certainly depress the price. As a result, they look to Wall Street.
An investment bank offers to acquire the shares at a discount to the market’s closing price later that day, usually around noon. The bank then plans to sell the shares at a higher price to its trading customers and pocket the difference. According to statistics and market participants, four or five banks handle the overwhelming bulk of deals, and the same lineup of hedge funds queue up to acquire the shares.
Wall Street lives on information edges, and the bankers are holding a golden nugget at the start of a block deal: they know that a wave of selling is on the horizon. This is because public shareholders prefer to replicate the moves of company insiders, thinking they are better informed. The supply-demand balance is further thrown off by a deluge of shares for sale.
According to persons involved with the investigations, regulators assume that investment banks have been informing their top customers, who then leap in and sell ahead of the wave. The stock-price decline started in several of the transactions analyzed by the Journal in the late morning or early afternoon, around the time sellers normally notify bankers of their intentions.
Pension funds, endowments, and foundations are often the ultimate losers in these scenarios. Private equity firms employ block trades to unwind interests in freshly public businesses, and they invest alongside them.
According to public records, Bain Capital names Indiana teachers and Los Angeles municipal employees among its investors, who lost $33 million as Canada Goose’s shares dropped in the final hours of trading before it sold a slug of stock. Pension funds are also large investors in Boston-based T.H. Lee Partners, which, according to trading data, lost out on at least $31 million in revenues on five block transactions between 2018 and 2021 owing to inexplicable price decreases.
Block trades are a high-risk strategy. Banks compete to acquire shares at small discounts, and if they underestimate investor demand or see a rapid, unexpected dip, their profit margin might swiftly disappear.
This offers a financial incentive for information to be leaked ahead of time. Knowing which investors will purchase the shares and at what price might help a bank fine-tune its offer and reduce the risk of losing money. And tipping off top funds to a lucrative trade—selling short a stock before a block sale is usually a winner—could help you gain favor with key customers.
Other factors might cause a stock to decrease ahead of a block deal. Employees and early investors are frequently barred from selling their shares for a period of time after a firm goes public, usually six months. Hedge funds are aware of the expiration dates of these so-called lockups and often short the stock ahead of time.
However, the Journal’s list contains fewer than 20 block transactions that seem to be tied to the expiry of IPO lockups, and they fared only marginally worse than the rest. There was no evident cause for the stock to underperform in the great majority of cases.
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The majority of them are similar to what occurred to 3G Capital, a private equity company recognized for its investments in well-known businesses. 3G performed at least three block swaps between 2018 and 2021 to reduce its shares in two of them: Kraft and Restaurant Brands International Inc., the parent company of Burger King. It engaged Morgan Stanley to sell the shares each time, and the price swung against it each time.
On Aug. 7, 2018, shares of Kraft climbed all morning, outperforming the S&P index of other big consumer-products companies. At 12:26 p.m.—right around the time that sellers of block trades typically engage banks—the stock price started to fall sharply. It closed down 1.6%, lagging the index and costing 3G Capital some $13 million in lost proceeds.
A year later, shares of Restaurant Brands cratered at midday and finished down 1.8 percent on a day when the index climbed in another 3G block deal. According to the Journal’s investigation, the renowned penny-pinching investment firm—which pioneered a method of cost control and required staff to acquire permission for color photocopies—lost $56 million in revenues.
—Juliet Chung and Susan Pulliam contributed to this report.
Liz Hoffman, Corrie Driebusch, and Tom McGinty may be reached at [email protected], [email protected], and [email protected], respectively.
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