Morgan Stanley (MS) won a narrowing of claims in a lawsuit by Singapore investors who said the firm induced them to buy synthetic collateralized debt obligations that were designed to fail.
U.S. District Judge Leonard Sand on Oct. 31 granted the firm’s request to throw out the claims of negligent misrepresentation, breach of fiduciary duty, unjust enrichment, aiding and abetting. Sand, in New York, allowed other claims of fraud and breach of good covenant and good faith to continue.
Last year, a group of investors sued Morgan Stanley, the sixth-largest U.S. bank by assets, alleging it created collateralized debt obligations -- a debt security usually backed by bonds or corporate loans -- and failed to inform the investors that it was a counter-party to the agreements. For each dollar the investors lost, the bank gained a dollar, the investors said.
Sand said the plaintiffs “have pled what amounts to self- dealing by Morgan Stanley, insofar as Morgan Stanley was betting against, or ‘shorting’ the synthetic CDOs that it had itself created. The engineered frailty of the CDOs and Morgan Stanley’s positions on both sides of the deal adequately alleges motive.”
‘Place on Guard’
The judge said that New York-based Morgan Stanley hasn’t proffered evidence to suggest that investors were “placed on guard” and concluded the plaintiffs have shown sufficient evidence that they acted reasonably in relying upon the firm’s statements.
“Even a sophisticated investor armed with a bevy of accountants, financial advisers, and lawyers could not have known that Morgan Stanley would select inherently risky underlying assets and short them,” Sand said.
Several Morgan Stanley units created the scheme to redirect funds into the bank’s own coffers, the investors including the Singapore Government Staff Credit Cooperative Society Ltd. said in the complaint.
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