Morgan Stanley Can Be Sued by Hong Leong Over Misselling

Morgan Stanley can be sued by Singapore’s Hong Leong Finance Ltd. in a New York court over claims it deceptively sold instruments designed to fail.

Morgan Stanley’s request to stop Hong Leong from a lawsuit in the U.S. was rejected by Singapore High Court judge Belinda Ang, the Singapore-based company said in papers filed yesterday in federal court in Manhattan. Ang in November granted an interim order preventing Hong Leong from suing Morgan Stanley.

The New York-based investment bank is appealing the decision, it said in a filing yesterday. Nick Footitt, a Morgan Stanley spokesman in Hong Kong, declined to comment today.

The ruling means a complaint that Hong Leong filed in August in U.S. federal court can proceed. Morgan Stanley sold so-called Pinnacle notes as relatively safe while rigging them to fail for its own benefit, Hong Leong said. The Singapore firm entered into a distribution agreement with Morgan Stanley to sell about $72.4 million of the notes.

Hong Leong was required to compensate customers for at least $32 million in losses when the notes failed, according to the August filing.

Morgan Stanley issued the debt through a special-purpose entity it controlled called Pinnacle Performance Ltd., according to the complaint. The investment bank was also positioned to profit when the notes failed because it had entered into swap transactions with other noteholders through another affiliated entity, Morgan Stanley Capital Services Inc., Hong Leong said.

The Business Times newspaper in Singapore reported the judge’s decision today.

The case is Hong Leong Finance Ltd. v. Pinnacle Performance Ltd., 12-cv-6010, U.S. District Court, Southern District of New York (Manhattan).

Before it's here, it's on the Bloomberg Terminal.