Morgan Stanley Accused of Misusing Data in Short Selling

  • Russian billionaire Oleg Deripaska alleges millions in losses
  • Trial of suit against bank holding company starts in New York

Morgan Stanley used inside information about Russian tycoon Oleg Deripaska’s $1.5 billion investment in an auto-parts maker to illegally profit from its own short selling, the billionaire’s lawyer told a New York jury.

Deripaska, owner of United Co. Rusal Plc, the world’s biggest aluminum producer, sued Morgan Stanley and the lender on the deal, BNP Paribas SA, claiming they derailed his 20 percent stake in Magna International Inc. at the peak of the financial crisis and cost him at least $900 million. Paris-based BNP Paribas loaned Deripaska most of the money for the investment, with his Magna shares held as collateral. 

The trial, which started Monday in Manhattan federal court, is only against New York-based Morgan Stanley, after BNP Paribas was dismissed as a defendant. The financial services firm had been hired by BNP Paribas to sell Deripaska’s shares in the event of a margin call, which was made in September 2008, when Magna’s stock began to plunge.

Morgan Stanley contends its disposal of the shares was by-the-book, and that separate short positions the investment bank took against Magna with its own money were standard risk-management steps.

"Morgan Stanley was completely within its contractual rights, completely within industry standards," the bank’s lawyer, Jonathan Polkes, told jurors in his opening statement.

‘Walked Away’

Instead, Deripaska is to blame for the dispute because he “walked away" from his investment and refused to pay what he owed when the banks sent him a bill, Polkes said.

The jury was shown a clip from a videotaped deposition of Deripaska in which he said the loss on the investment -- the difference between how much he borrowed for the deal and how much was recovered when the stake was liquidated -- “wasn’t the end of the world.”

The lawsuit was filed by Deripaska’s investment vehicle for the Magna deal, Dutch-based Veleron BV, which seeks damages of $15 million to $25 million. The trial could last several weeks.

“This case is about Morgan Stanley choosing profit over honoring its obligations,” Aaron Marks, a lawyer for Veleron, said in his opening statement.

‘Perversely Incentivized’

Veleron and its Russian parent claim Morgan Stanley was “perversely incentivized” to favor a sale of the collateral because the investment bank faced its own liquidity crisis at the time and stood to get a large fee for disposing of the shares, Deripaska claims.

The investment bank was also accused of failing to get the best price for the 20 million Magna shares by selling them in a private sale instead of a public one, and over just a few hours instead of weeks, according to the complaint.

Deripaska, 47, argues BNP Paribas and Morgan Stanley should have given him more time to deal with the fallout from the collapse of Magna’s shares. In the complaint, his investment company says the Russian government was prepared to help Russian companies that were having liquidity problems at the time, and that a deal could have been worked out.

"These claims are entirely without merit and we look forward to proving that in court," Morgan Stanley spokesman Mark Lake said in a statement.

The case is Veleron Holding BV v. Morgan Stanley, 1:12-cv-05966, U.S. District Court, Southern District of New York (Manhattan).

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