Asian investors win right to sue Morgan Stanley - FT.com

Asian investors win right to sue Morgan Stanley - FT.com

A group of Singaporean investors who claim Morgan Stanley sold them opaque financial products that were designed to fail have won the right to sue the US investment bank in New York.

Morgan Stanley had asked the New York court to dismiss the case brought by Singaporean retail investors who were sold via local intermediaries $155m of so-called Pinnacle Notes – complex products that were sold in 2006 and 2007 before losing almost 100 per cent of their value during the financial crisis.

In a class-action complaint filed late last year, the investors alleged that Morgan Stanley had designed the notes in such as a way that they would generate losses that would then produce a corresponding profit for the bank. Morgan Stanley has denied any allegations of wrongdoing.

The complaint alleged that the Pinnacle Notes were marketed as “conservative investments” while in fact being “specifically designed to wipe out the ... $154.7m investment” that would be redirected “into Morgan Stanley’s coffers”.

The investors allege that Morgan Stanley used synthetic collateralised debt obligations that it had created as collateral to underpin the notes, rather than safe securities, such as US Treasuries, as is common industry practice.

A synthetic CDO is a portfolio of credit default swaps – contracts that insure against bond defaults. According to the complaint, Morgan Stanley deliberately linked the CDOs to risky companies, including Icelandic banks and companies with high exposure to a US housing market downturn.

“The synthetic CDOs that Morgan Stanley created were not merely bets, but bets Morgan Stanley rigged, in which it placed itself on the side guaranteed to win (the ‘short’ side) and placed Plaintiffs on the side guaranteed to lose (the ‘long’ side),” the suit said.

The Pinnacle case is a rare example in which retail investors were given exposure to CDOs. Typically, banks sold CDOs to institutional investors.

In a document filed with a New York district court on Monday, Judge Leonard Sand, a federal judge for the US District Court for the Southern District of New York, said: “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.”

Morgan Stanley declined to comment on Thursday. The bank has disputed the allegations in court documents, saying there were “extensive risk disclosures” in the prospectus which “made clear that the Pinnacle Notes were sophisticated instruments, involved a high level of risk, and could result in the loss of the entire principal amount invested”.