The mystery trader and the Morgan Stanley probe

In today’s newsletter:

• Hedge fund links ex-employee to Morgan Stanley probe

• The takeover battle riling up Madrid 

• Blackstone vs merger arbs

The mystery trader allegedly tied to Morgan Stanley’s block trading probe

Since January, it has been public knowledge that an unnamed investor told Morgan Stanley’s Pawan Passi, “I know who my daddy is,” during a phone call.

The conversation, which took place in August 2021, came to light during a regulatory probe into the Wall Street bank’s block trading business. The investigation ultimately led to a $249mn fine.

But the person on the other side of that line has never been identified. Now one hedge fund based in Nevada says it believes it knows who it was: its former employee Robert Gagliardi.

The allegation is part of Evolution Capital Management’s response to a lawsuit that Gagliardi brought against it in London, over a $7.5mn bonus he says he is owed but the hedge fund is refusing to pay, DD’s Kaye Wiggins and Ortenca Aliaj report.

Gagliardi made tens of millions of dollars for Evolution in a few months, according to court filings. The hedge fund says one reason not to pay the bonus is that it believes he is connected to several of the trades that US authorities scrutinised at Morgan Stanley in a years-long block trading probe.

The authorities did not announce actions against anyone who traded on Passi’s or the bank’s information.

Gagliardi “regards the latest claims as a desperate attempt to rewrite history after the event, and he looks forward to responding and robustly defending his position”, his spokesperson said, adding he “categorically denies any insinuations of wrongdoing” and “has never been accused of or charged with any wrongdoing nor has he faced any regulatory restrictions”.

According to Evolution, Gagliardi had formed a close relationship with Passi, then the head of the bank’s US equity syndicate desk.

In the August 2021 conversation, the investor allegedly told the Morgan Stanley banker that Passi had “put [him] in the fucking game” on block trades, adding that he “would be at the kiddie table if it wasn’t for” Passi.

While Gagliardi was never accused of any wrongdoing, the US Securities and Exchange Commission handed Passi a $250,000 civil penalty and barred him from working in the industry.

The FT reported earlier this month that Gagliardi was the trader who bet against Canada Goose after speaking to a Morgan Stanley banker.

At the time, he was working for Segantii Capital Management, the Hong Kong hedge fund that’s shutting down after Hong Kong’s Securities and Futures Commission last month announced a case against it, alleging criminal insider dealing. That separate case does not involve Gagliardi and relates to trades that took place before he joined the hedge fund.

Segantii has said it plans to defend itself “vigorously” in that case.

The Spanish bank takeover battle entering uncharted territory

The biggest takeover battle in European banking this year is raising an existential question for M&A followers: when is a merger not a merger?

Spanish bank BBVA is pursuing a €10bn hostile bid for its smaller rival Banco Sabadell, which rebuffed an initial friendly approach.

But even if it acquires Sabadell, which means persuading a majority of its shareholders to sell, that doesn’t mean the two banks are necessarily merging, the FT’s Barney Jopson and Owen Walker report.

Huh?

The twist here comes from Spain’s government, which is openly opposed to the deal.

It cannot stop Carlos Torres, BBVA’s executive chair, from launching his all-share tender offer to Sabadell shareholders. But if BBVA buys Sabadell, the government would have the power to veto a merger of the two entities.

So Torres could end up like the buyer of an expensive new car who is then told he isn’t allowed to have the keys.

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But this is where the meaning of a merger comes in. To avoid frightening off Sabadell shareholders unnerved by this risk, BBVA has a reassuring new message: even if we aren’t allowed to formally join forces, and own two banks competing against each other, we can still secure a lot of the benefits.

Torres has argued that if the banks officially tie-up, he would achieve €850mn in annual cost savings. But last week he said that even if BBVA ended up owning two detached Spanish banks, “our estimates are that we could optimise to a large extent the savings in overheads and technology costs”.

It makes you wonder about all those bankers who preach the gospel of cost savings from merger — yes, actual merger — synergies.

But people close to Sabadell are deeply sceptical of BBVA’s argument.

“That’s really either ill-informed or wishful thinking,” said one person familiar with the smaller bank. They estimated that the non-merger cost savings would be €100mn to €150mn per year.

Hipgnosis takeover: Blackstone tries to fend off hedge funds 

Blackstone has been vying to buy UK-listed music rights owner Hipgnosis Songs Fund for months.

Now, the private equity giant is facing another hurdle: a group of hedge funds potentially forming a blocking stake.

The US and UK firms that have snapped up Hipgnosis shares include TIG — now its largest investor at 14 per cent — Glazer Capital, Kryger Capital and Sand Grove Capital Management.

These aren’t just any hedge funds. They trade on the stock movements of takeover targets — a strategy known as merger arbitrage.

The two sides seem to be at an impasse. One person familiar with some of the hedge funds’ thinking said the group wanted Blackstone to consider a higher price to secure their votes — a financial manoeuvre known as “greenmailing”.

But Blackstone’s not buckling. On Tuesday it said its $1.6bn bid was a “best and final” offer.

Earlier this month, the company switched to a so-called scheme of arrangement for the bid, which can help prevent a small minority of investors from retaining their shares. But with the hedge funds now involved, that plan has pitfalls.

Blackstone needs 75 per cent of voting shares at a meeting in July (as opposed to the previous 50 per cent).

And an analysis by the FT shows that well over a quarter of the shares are held by these hedge funds — meaning they’re well positioned to vote down the deal next month.

The move from Blackstone, declaring the latest bid a best and final offer, raises the stakes. Blackstone can’t increase the offer or make a new one, meaning that any attempt to block the deal could simply result in its collapse.

DD’s watching to see who might blink first: Blackstone or the hedge funds.

Job moves

• KKR’s chair in Emea Johannes Huth is retiring after more than two decades at the firm. He will stay on as a senior advisory partner, and will still serve on the boards of Marshall Wace, Axel Springer and Roompot. 

• UBS is growing its team in the Middle East. It has hired Bassel Al Zaouk from Deutsche Bank to build out its domestic wealth management business in Saudi Arabia and Ali Khunji from HSBC to do the same in Bahrain as well as the Eastern Province in Saudi Arabia. UBS has also hired Rana Al Emam, also from HSBC, to expand its business in Abu Dhabi. 

• Gibson Dunn has promoted George Sampas to co-chair of the firm’s mergers and acquisitions group in New York.

Smart reads

House of Arnault It took decades and near superhuman attention to detail to build LVMH into a luxury empire. Chief executive Bernard Arnault isn’t done yet, Bloomberg reports.

Vin britannique British wine is no longer a punchline, and the potential sale of Aim-listed winemaker Chapel Down could be a sign of foreign producers taking notice, Lex writes.

Crunch time Citigroup chief executive Jane Fraser’s at the midpoint of what she’s called a critical year for the bank’s turnaround, The Wall Street Journal reports.

News round-up

JPMorgan brings in over $15bn from wealthy clients looking to cut tax bills (FT)

EU charges Microsoft with antitrust violations over Teams (FT)

LVMH’s Bernard Arnault emerges as personal stakeholder in Richemont (FT)

Blackstone draws €1bn into European private credit fund (FT)

US defence industry faces uncertainty despite production ‘boomlet’ (FT)