A hedge fund has named a former Segantii Capital Management employee in connection with several transactions that used confidential Morgan Stanley information.
Evolution Capital Management said in court filings that its former employee Robert Gagliardi, a block trading specialist nicknamed “Gags,” was believed to be linked to several trades scrutinized by U.S. authorities as part of the investigation that resulted in the Wall Street bank being fined $249 million.
It also highlighted his relationship with the bank’s former head of US equity syndicate, Pawan Passi, saying it was understood that the block trader referred to Passi as his “daddy” who “deposited”. [him] in the damn game” at Blocktrades.
Evolution made these statements about Gagliardi in court documents for a lawsuit he filed against the company in London, which centers on his claim that he was entitled to a $7.5 million bonus upon leaving the company.
In a breach of contract lawsuit, Gagliardi said his earnings exceeded expectations, bringing in more than $67 million between May and December 2021, among other things, and that Evolution failed to pay the bonus “in bad faith.”
Evolution responded in a court document filed this month that one reason it is not paying out the bonus now is that it believes Gagliardi is one of the unnamed investors the Securities and Exchange Commission and the Justice Department referred to in their January statements investigating block trading at Morgan Stanley. Evolution is countersuing him for the $7 million he was paid during the 11 months he worked there. Evolution also denied that Gagliardi earned such high profits.
The SEC and DoJ documents cited by Evolution in its filing describe several cases in which investors bet against companies after speaking to Morgan Stanley bankers who had access to confidential information about upcoming block trades. Block trades involve the sale of large amounts of a company’s shares, which can depress the stock price.
Authorities have not named or announced any action against individuals who traded on the information they penalized Passi and the bank for sharing. The SEC charged the bank and Passi with fraud, and the bank entered into a non-prosecution agreement with the U.S. Attorney’s Office in Manhattan. Passi admitted his wrongdoing and agreed with the U.S. Attorney’s Office for a stay of prosecution.
Gagliardi worked at Hong Kong-based Segantii at the time of the transactions described by the SEC and DOJ and later moved to Evolution.
Segantii is now being shut down after the Hong Kong Securities and Futures Commission opened a criminal insider trading case against the company last month. This separate case does not involve Gagliardi, but concerns transactions that took place before he joined the firm. Segantii has said it will defend itself “vigorously.”
Passi, Morgan Stanley and the U.S. Attorney’s Office for the Southern District of New York all declined to comment, and Segantii, Evolution and the SEC did not respond to emails seeking comment.
A spokesman for Gagliardi said it would be “inappropriate for him to speak outside of this [court] process” and that it was “disappointing that the Financial Times had chosen to report on these events at this time”.
He said Gagliardi “views the recent allegations as a desperate attempt to rewrite history with the benefit of the doubt, and he looks forward to responding and vigorously defending his position.” He said Gagliardi “categorically denies any suggestion of wrongdoing” and “has never been accused or charged with any wrongdoing, nor has he been subjected to any regulatory restrictions.”
Court documents are due to be filed by July 5 outlining Gagliardi’s response to Evolution’s latest lawsuit linking him to the U.S. cases.
Evolution, in its defense against Gagliardi’s claim, said Passi was “one of the [his] closest contacts”.
It was said that Gagliardi told Passi in a phone call in August 2021 while he was working at Evolution, “I know who my father is,” and said Passi had ” [him] in the damn game” at Blocktrades, adding that he would be “sitting at the kids’ table if” Passi wasn’t there.
It was reported that Gagliardi said the following words in a phone call with his evolution colleague Robert Toresco in April 2021: “You keep talking about damn processes, processes, processes. I don’t understand what that means.”
“If you think I’m not going to act when the head of MS ECM calls me, you’re fucking crazy. This is crazy. We get attention that very few people get.” Passi was the head of the bank’s U.S. equity syndicate, part of the Equity Capital Markets (ECM) division.
In his lawsuit against Evolution, Gagliardi said the Nevada-based hedge fund “aggressively recruited” him and promised him a bonus based on his contribution to the company’s revenue and profits.
In court documents, he said he had “received [Evolution’s] rules, policies and procedures to the extent they were explained to him and/or applicable to him,” and said that allegations contained in Evolution’s filings that he had breached the rules were either not raised with him at the time or “were not suggested as being serious and/or urgent.”
He said Evolution and its founder Michael Lerch had taken a number of steps they would not have taken if they had had “real or serious concerns” about him.
These included paying legal fees in, for example, December 2021 to assist him “in any criminal and/or SEC investigations” and taking steps in January 2022 to certify him as a “suitable and reliable” person under Financial Conduct Authority rules.
This included appointing him to the risk committee in October 2021 and paying a discretionary bonus to his assistant who handled deals for him. He said he and Evolution discussed the prospect of the company investing in an independent fund that he would manage in January 2022.
According to Evolution, Lerch believed that including Gagliardi on the risk committee would make him “more likely to show … respect.” [Evolution’s] risk management process”.
The hedge fund, where Gagliardi worked from April 2021 to March 2022, said that when the SEC served it with a subpoena related to block trades in January 2022, it became clear to it that Gagliardi “appeared to have played a central (rather than minor) role in the U.S. criminal investigation” into block trading that led to the fine against Morgan Stanley.
According to Evolution, documents released this year by the SEC and DOJ gave the impression that during the period from 2018 to 2021 covered by their investigations, Gagliardi “regularly traded … which at a minimum consisted of or involved using confidential information to enter into trades and thereby generate profits that gave him an unfair advantage over other market participants.”
It states that the payment of a voluntary bonus “to an employee who has engaged in such reprehensible conduct (even if this conduct was documented prior to his employment by [Evolution]) could damage the employer’s reputation with its customers, potential customers and the market generally.” Evolution did not say why it believed the investor in question was Gagliardi.
The SEC believes he is the investor the SEC was referring to when it described three cases in which a hedge fund bet against companies prior to block trades after discussions with Passi. Two of the cases involved shares of medical services company Medpace and the third involved apartment rental group Invitation Homes.
Evolution said it also believes Gagliardi was the investor in a deal with Canada Goose that the Justice Department described in a document related to his case. Those deals took place while Gagliardi was working at Segantii.
A court document filed by Gagliardi on January 12 this year states: “No regulator in the world has ever made allegations against [Gagliardi] or measures taken against him.”
Evolution attempted to sue Gagliardi in New York, arguing in a November 2022 court filing that he was not entitled to the bonus and must repay any bonus already paid. However, last year Evolution obtained a preliminary injunction halting the proceedings in the U.S.
In its New York filing, Evolution said U.S. authorities seized Gagliardi’s phone in connection with a federal criminal investigation into his block trading practices.
In his London lawsuit, filed a few days later, he said he had been “not accused of any wrongdoing” and added: “Any suggestion of [Evolution] The [Gagliardi] has engaged in, or been accused of engaging in, inappropriate or criminal conduct is false.”
In the ruling granting the injunction, a London judge said there was a “plausible basis for believing” that an email sent by Toresco “distorted” Gagliardi’s links to the United States “for maximum effect.”