The hedge fund named a former Segantii Capital Management employee in connection with several trades that used inside information from Morgan Stanley.
Evolution Capital Management said in court filings that it believes its former employee Robert Gagliardi, a block trading specialist nicknamed “Gags,” was connected to several trades that U.S. authorities were looking into in an investigation that led to the bank’s Wall Street paid $249 million. fine.
He also highlighted his relationship with the bank’s former US equity syndicate head Pawan Passi. It said it believed the block trader referred to Passi as his “dad” who “gave [him] in that shitty game” on block deals.
Evolution made the statement about Gagliardi in court filings for the London lawsuit he filed against it, which centers on his claim that he is entitled to a $7.5 million bonus after leaving the company.
In the breach-of-contract lawsuit, Gagliardi said its revenues exceeded expectations, including generating more than $67 million between May and December 2021, and Evolution “in bad faith” failed to pay the bonus.
Evolution responded in a court document filed this month that one of its reasons for not paying the bonus now was that it believed Gagliardi was one of the unnamed investors the Securities and Exchange Commission and the Justice Department cited in their statements released in January about Morgan Stanley’s block trading probe. Evolution is suing him for $7 million it paid him during the 11 months he worked there. She also disputed that Gagliardi generated such high returns.
SEC and DoJ documents cited by Evolution in its filing describe several instances in which investors bet against companies after speaking with Morgan Stanley bankers who had access to confidential information about upcoming block deals. Block deals are sales of large amounts of a company’s stock that can depress its stock price.
Authorities have not named or announced any action against anyone who traded using 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 nonprosecution agreement with the U.S. attorney’s office in Manhattan. Passi pleaded guilty to wrongdoing and agreed to a deferred prosecution deal with the U.S. attorney.
Gagliardi worked at Hong Kong’s Segantia at the time of the deals the SEC and DOJ describe and later joined Evolution.
Segantii is now shutting down after Hong Kong’s Securities and Futures Commission announced a lawsuit against it last month, alleging insider trading. This separate case does not involve Gagliardi and concerns trading that took place before he joined the firm. Segantii said it plans to “vigorously defend itself”.
Passi, Morgan Stanley and the U.S. Attorney’s Office for the Southern District of New York 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 beyond that [court] process’ and that it was ‘disappointing that the Financial Times chose to report on these proceedings at this stage’.
He said Gagliardi “views the latest claims as a desperate attempt to rewrite history after the event and looks forward to a response and a strong defense of his position”. He said Gagliardi “categorically denies any suggestion of wrongdoing” and “has never been accused or charged with any wrongdoing or faced any regulatory restrictions”.
Court documents setting out Gagliardi’s response to Evolution’s latest filing linking him to the US cases are expected to be filed by July 5.
Evolution in its defense against Gagliardi’s claim that Passi was “one of the [his] closest contacts”.
She stated that she believed Gagliardi told Passi in an August 2021 phone call while he was working for Evolution that “I know who my dad is” and said that Passi “gave [him] in that shitty game” of block deals, adding that he “would be at the kid’s table if it wasn’t for” Passi.
It said that in a phone call with his Evolution colleague Roberto Toresco in April 2021, Gagliardi said words to the effect of: “You keep talking about the fucking process, process, process. I don’t understand what that means.”
“If you think that when the boss of MS ECM calls me, I won’t trade, you’re crazy. That’s crazy. We’re getting views that only a few guys have.” Passi was head of the bank’s US equity syndicate, which operates within its equity capital markets, or ECM, division.
In his lawsuit against Evolution, Gagliardi said the Nevada-based hedge fund “aggressively recruited” him and told him he would be paid a bonus tied to his contributions to her firm’s revenue and profits.
In court filings, he said he “observed [Evolution’s] rules, guidelines and procedures if explained and/or applicable to him” and stated that Evolution’s allegations in its filings that he violated its rules were either not raised with him at the time or “were not suggested as serious and/or urgent “.
He said Evolution and its founder Michael Lerch took a number of steps they would not have taken if 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 to certify him as a “fit and proper” person under the Financial Conduct Authority’s regime.
They also included appointing him to his risk committee in October 2021 and paying a discretionary bonus to his assistant who executed trades for him. He said that in January 2022 he and Evolution discussed the prospect of investing in an independent fund that he would manage.
Evolution reported that Lerch believed that including Gagliardi on the risk committee would make him “more likely . . . respect [Evolution’s] risk management process’.
The hedge fund, which employed Gagliardi from April 2021 to March 2022, said that when the SEC served it with a subpoena regarding the block trades in January 2022, it realized that Gagliardi “appears to be a central element (as opposed to merely an accessory) to the criminal investigation acts in the US” into the block trading that led to the Morgan Stanley fine.
Evolution said SEC and DOJ documents released this year gave the impression that during the 2018-2021 period covered by their probes, Gagliardi “engaged in regular conduct. . . which was or which involved at least the use of confidential information to enter trades and thereby generate profits in order to have an unfair advantage over other market participants”.
It stated the payment of a discretionary bonus “to an employee who engaged in such questionable conduct (even if such conduct predated his employment before [Evolution]) could damage the employer’s reputation with its clients, potential clients and the market in general”. Evolution did not say why it believed Gagliardi was the investor in question.
She said she believed she was the investor the SEC was referring to when it described three occasions when the hedge fund bet against companies after talking to Passi before block trades. Two of these events related to stakes in clinical services company Medpace and the third related to leasing group Invitation Homes.
Evolution said it also believes Gagliardi was an investor in a deal involving Canada Goose that the Justice Department described in a document outlining its case. These deals took place while Gagliardi worked at Segantia.
Gagliardi’s January 12 court filing of this year states: “No regulatory body anywhere in the world has brought charges against [Gagliardi] or have 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 return the bonus already paid, but won an anti-suit injunction last year that halted the US proceedings.
In its filing in New York, 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 was “not charged with any wrongdoing” and added: “Any proposal from [Evolution] that [Gagliardi] has engaged in or been accused of engaging in any improper or criminal conduct is false.”
In a ruling granting an injunction against the lawsuit, a London judge said there was a “plausible basis to allege” that the email sent by Toresco was “spinning.” . . for maximum effect” of Gagliardi’s ties to the US.