26 June, 2024 by Kaye Wiggins in Hong Kong and Ortenca Aliaj in London

A hedge fund has named a former Segantii Capital Management employee in connection with several trades that used confidential information from Morgan Stanley. 

Evolution Capital Management said in court filings that it believed its former employee Robert Gagliardi, a block trading specialist nicknamed “Gags”, was linked to several of the trades that US authorities scrutinised in the probes that led to the Wall Street bank paying a $249mn fine.

It also highlighted his relationship to the former head of the bank’s US equity syndicate, Pawan Passi. It said it believed the block trader referred to Passi as his “daddy” who had “put [him] in the fucking game” on block trades.

Evolution made the statements about Gagliardi in court filings for a London lawsuit that he brought against it, which centres on his claim that he is entitled to a $7.5mn bonus after leaving the firm. 

In a breach-of-contract claim, Gagliardi said his returns had exceeded expectations, including generating more than $67mn between May and December 2021, and Evolution had “in bad faith” failed to pay the bonus.

Evolution responded, in a court document filed this month, that one reason not to now pay the bonus was that it believed Gagliardi was one of the unnamed investors that the Securities and Exchange Commission and Department of Justice were referring to in statements published in January about the Morgan Stanley block trading probe. Evolution is countersuing him for the $7mn it paid him during the 11 months he worked there. It also disputed that Gagliardi had generated such high returns.

The SEC and DoJ documents cited by Evolution in its filing describe several occasions when investors bet against companies after talking to Morgan Stanley bankers who had access to confidential information about upcoming block trades. Block trades are sales of large amounts of a company’s stock, which can depress its share price. 

The authorities did not name or announce any actions against anyone who traded using the information that they penalised 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 US attorney’s office in Manhattan. Passi admitted to misconduct and agreed a deferred prosecution agreement with the US attorney.

Gagliardi worked at Hong Kong-based Segantii at the time of the trades that the SEC and DOJ describe, and later joined Evolution. 

Segantii is now 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 trading that took place before he joined the firm. Segantii has said it plans to defend itself “vigorously”. 

Passi, Morgan Stanley and the US 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 comment in detail outside of that [court] process”, and that it was “disappointing that the Financial Times has chosen to report on these proceedings at this stage”.

He said 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”. He said Gagliardi “categorically denies any insinuations of wrongdoing” and “has never been accused of or charged with any wrongdoing nor has he faced any regulatory restrictions”.

Court documents setting out Gagliardi’s response to Evolution’s latest filing, which links him to the US cases, are expected to be filed by July 5.

Evolution said in its defence against Gagliardi’s claim that Passi was “one of [his] closest contacts”.

It said it believed Gagliardi had told Passi in an August 2021 phone call, while working at Evolution, that “I know who my daddy is” and said 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. 

It said that in an April 2021 phone call with his Evolution colleague Robert Toresco, Gagliardi had said words to the effect of: “You keep talking about fucking process, process, process. I don’t get what that means.” “If you think that when the head of MS ECM calls me, I’m not going to trade, then you are fucking crazy. This is crazy. We are getting looks that only a few guys get.” Passi was the head of the bank’s US equity syndicate desk, which sits within its equity capital markets, or ECM, business.

In his claim against Evolution, Gagliardi said the Nevada-based hedge fund had “aggressively recruited” him and told him he would be paid a bonus linked to his contributions to its revenue, and to the business’s profits.

He said in court filings that he “adhered to [Evolution’s] rules, guidance and procedures insofar as explained and/or applicable to him” and said Evolution’s claims in its filings that he had violated its rules were either not raised with him at the time or “not suggested to be serious and/or urgent”.

He said Evolution and its founder Michael Lerch took a series of steps they would not have taken had they had “genuine or serious concerns” about him.

These included paying legal fees around December 2021 to support him “in any criminal and/or SEC investigation” and taking steps in January 2022 towards certifying him as a “fit and proper” person under the Financial Conduct Authority’s regime.

They also included appointing him to its risk committee in October 2021 and paying his assistant — who executed trades for him — a discretionary bonus. He said that in January 2022 he and Evolution spoke about the prospect of it investing in an independent fund he would manage.

Evolution said Lerch had thought that involving Gagliardi in the risk committee would make him “more likely to . . . respect [Evolution’s] risk management process”.

The hedge fund, which employed Gagliardi from April 2021 until March 2022, said that when the SEC served it with a subpoena related to block trades in January 2022, it realised that Gagliardi “appeared to be central to (as opposed to merely ancillary to) the US criminal investigation” into block trading that led to the Morgan Stanley fine. 

Evolution said the SEC and DOJ documents published this year gave the impression that during the 2018-2021 period covered by their probes, Gagliardi “was engaged in regular conduct . . . which was or which involved at the very least using confidential information to enter trades and thus generate profits so as to give him an unfair advantage over other market participants”. 

It said paying a discretionary bonus “to an employee who had engaged in such disreputable conduct (even where that conduct pre-dated his employment by [Evolution]) would be liable to bring the employer into disrepute itself with its clients, potential clients and the market generally”. Evolution did not say why it believed Gagliardi was the investor in question. 

It said it believed he was the investor the SEC was referring to when it described three occasions on which a hedge fund bet against companies after talking to Passi ahead of block trades. Two of the occasions related to shares in the clinical services company Medpace, and the third related to the home leasing group Invitation Homes.

Evolution said it also believed Gagliardi was the investor in a trade involving Canada Goose, which the Department of Justice described in a document outlining its case. Those trades took place while Gagliardi worked at Segantii.

A court filing from Gagliardi dated January 12 this year said: “No regulator anywhere in the world has ever made allegations against [Gagliardi] or taken action against him.”

Evolution tried to sue Gagliardi in New York, saying in a November 2022 court filing that he was not entitled to the bonus and should repay a bonus already paid, but he won an anti-suit injunction last year that halted the US proceedings.

In its New York filing, Evolution said US authorities had confiscated Gagliardi’s phone in connection with a federal criminal investigation into his block trading practices.

In his London claim, filed days later, he said he had “not been accused of any wrongdoing” and added: “Any suggestion by [Evolution] that [Gagliardi] engaged in, or has been accused of engaging in, any improper or criminal conduct is false.” 

In the judgment granting the anti-suit injunction, a London judge said there was a “plausible basis for contending” that an email sent by Toresco “‘spins’ . . . for maximum effect” Gagliardi’s ties to the US.

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