Federal Prosecutors Target Morgan Stanley in CDO Fraud Investigation
Federal prosecutors are assessing whether Morgan Stanley defrauded investors in mortgage-derivatives collateralized debt obligations (“CDOs”) that it helped create and then bet against, according to reports in the Wall Street Journal and Bloomberg. The Securities and Exchange Commission is also investigating. Several rounds of subpoenas have reportedly been issued. Investigators are evaluating whether Morgan Stanley, like others, misrepresented their true roles and conflicting interests in CDO deals sold to investors.
The Morgan Stanley CDOs under scrutiny include two that were named after U.S. Presidents James Buchanan and Andrew Jackson. Traders referred to them as “Dead Presidents” deals. Citigroup Inc. underwrote and marketed the Jackson deal to investors, while UBS AG did the same for the Buchanan deal, according to the article.
So far, Morgan Stanley is saying it knows nothing about such a probe. After the SEC filed its fraud case against Goldman last month, a Morgan Stanley spokeswoman issued what may have been a carefully worded and limited denial: "Morgan Stanley did not make any misrepresentations to investors concerning the selection of the collateral for CDOs underwritten by Morgan Stanley."
The Manhattan U.S. Attorney's office and the SEC reportedly declined to comment to the Wall Street Journal, which attributed the facts of the story it ran to traders and people familiar with the matter.
Citigroup said only that it is cooperating with the SEC and other regulatory agencies about its activities in the subprime mortgage market. UBS said it is "responding to a number of governmental inquiries and investigations" related to mortgage securities. Both Citigroup and UBS refused to comment about their roles in the “Dead Presidents” deals.
Wall Street firms are being subjected to a full court press in the wake of revelations about their role in the financial crisis and similar conduct by Goldman Sachs, which recommended CDO deals that it referred to in internal emails as “shitty.”
The investigation into Morgan Stanley’s conduct arose out of the ongoing fraud investigation launched by the SEC in 2009, which involves more than a dozen Wall Street firms. The related criminal probe is being handled by the Manhattan U.S. Attorney's office.
The Morgan Stanley CDO deals in question had a leverage feature that made it more likely that such investors could lose money if the underlying bonds performed poorly. This feature was not disclosed in some offering documents, according to the article.
Morgan Stanley traders shorted the deals (i.e., bet that the underlying bonds would perform poorly), according to traders. These short positions were also not disclosed in some deals, according to the article. How much money Morgan Stanley made with these wagers is as yet undetermined.
Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing institutional and corporate investors that lost money in CDOs and other structured finance instruments. For further information, please contact us.
