Thursday, December 31, 2009

Morgan Stanley sued over failed $1.2 billion CDO

Reuters - Wednesday, December 30. By Jonathan Stempel

NEW YORK - Morgan Stanley has been sued by a Virgin Islands pension fund that accused the Wall Street bank of defrauding investors by marketing $1.2 billion of risky mortgage-related notes that it expected to fail.

The lawsuit filed December 24 in Manhattan federal court said Morgan Stanley collaborated with credit rating agencies Moody's Investors Service and Standard & Poor's to obtain "triple-A" ratings for notes marketed in 2007 as part of a collateralized debt obligation known as Libertas.

According to the complaint, the CDO was backed by low-quality assets, including securities issued by subprime lenders New Century Financial Corp, which quickly went bankrupt, and Option One Mortgage Corp, then owned by H&R Block Inc .

The complaint alleged Morgan Stanley knew the CDO's assets were far riskier than the ratings suggested, but was "highly motivated to defraud investors" with pristine ratings because it was simultaneously "shorting" almost all the assets. This was a bet that their value would fall, which they did in 2008. "Morgan Stanley was betting the entire investment it was promoting would fail," according to the complaint, which was made available on Tuesday. "The firm achieved its objective." Alyson Barnes, a Morgan Stanley spokeswoman, declined to comment. S&P spokesman Frank Briamonte had no immediate comment. Moody's did not immediately return a call seeking comment. Moody's, a unit of Moody's Corp , and S&P, a unit of McGraw-Hill Cos , were not named as defendants.

Many banks face lawsuits from investors who say they were misled into investing in securities they believed were safe but which were in fact tied to risky subprime mortgages.

Morgan Stanley is also a defendant in a closely watched case in the same Manhattan court that concerns whether rating agencies deserve free speech protection for their opinions.

The December 24 complaint said Morgan Stanley knew securities in the Libertas CDO were suffering a dramatic rise in delinquencies, but provided a misleading "risk factor" in a prospectus that rising delinquencies "may" hurt values in the $1 trillion residential mortgage-backed securities market. It called this representation "analogous to Captain Smith's telling passengers of the Titanic that some ships have 'recently sunk' in the Atlantic and therefore 'our ship may sink,' without mentioning the facts that his ship struck an iceberg, had a hole in it, and was filling with water."

The lawsuit seeks class-action status, and also seeks compensatory and punitive damages, among other remedies. It was filed by Coughlin Stoia Geller Rudman & Robbins LLP, a law firm specializing in securities class-action lawsuits. Morgan Stanley shares were up 22 cents at $29.51 in afternoon trading on the New York Stock Exchange.

The case is Employees' Retirement System of the Government of the Virgin Islands v. Morgan Stanley & Co et al, U.S. District Court, Southern District of New York, No. 09-10532.


Anonymous said...

Thanks for the news and Wish the justice will come to Singapore also someday!

Anonymous said...

quite similar to DBS's HN5. I was told in this blog that DBS's personnel jumped in joy when HN5 failed.

Anonymous said...

morgan staley did the same thing with pinnacle notes, which are toxic assets masquarading as investment grade securities.

Is MAS aware of this?

PlumbersCrib and TanklessKing said...

Shop at <a href="></a> for your Steam Shower system from Mr. Steam

Anonymous said...

MAS where are you ? What are you going to do about the our money lost in the Pinnacle Notes ? Why are names of Temasek, Singapore Government, Singapore Telecom and even local banks name being used as reference entities to lure innocent investors to park their hard earned money in Pinnacle Notes arranged by Morgan Stanley ?

Anonymous said...

We are unable to force the FIs to compensate you. Please refer your case to FIDREC. Not happy with FIDREC take legal action against the FIs..Please don't send your complaints to us.Don't waste our time. We are powerless and useless too becuase our existence depends on the FIs.Please understand.

MAS Selamat

Anonymous said...

Even the authorities of a tiny speck in the Caribbean has the guts to do the right thing, and pursue against "misrepresentation" of structured products.

Like S'pore, the BVI has a liberal lessaz faire business corporate environment. However, unlike S'pore, BVI govt is willing to seek justice for its citizens. Even though this may hurt their business reputation in the short run.

Concerned said...

Sometimes, I wonder why lawyers will defend such obvious cheats. A lawyer with a good conscience should walk away from such cases. Lawyers who defend such cheats are more devious than the cheaters just because of the money.

Anonymous said...

Singapoeans please take note.

Our country wants to be a banking and financial hub. That is to say, banks and FI's want to set up operation here because Sinagapore is very supportive of businesses.

If we wanted to be an investors' hub, we would have said so in the first place. So please don't expect your complaints to go very far.

Anonymous said...

"We are unable to force the FIs to compensate you. Please refer your case to FIDREC. Not happy with FIDREC take legal action against the FIs..Please don't send your complaints to us.Don't waste our time. We are powerless and useless too becuase our existence depends on the FIs.Please understand.

MAS Selamat"

You forgot to add:

"While we are unable to help as we cannot micromanage, please continue to pay us and is time for bonus, please be generous. This is a great job i.e. a Titinium Rice Bowl" Any problem, we are protected by the 2 millionairs i.e. chairman and deputy chairman."

Anonymous said...

Whatever hub sgp want to be is not a problem but the issue here is fair play. We have been misled and cheated and sgp regulator did close to nothing as compared to other countries. Shame on them asking and drawing million of dollars in salary from taxpayers and at the end of the day, ask the taxpayers to look after themselves!!!!!

Anonymous said...

MAS Selamat,

If you are want Singapore to be financial hub, please look after investors' interest. If foreign investors have the choice, would they want to invest in Singapore or Hong Kong?

Blog Archive