According to Bloomberg, Singapore Government Staff Credit Cooperative Society Ltd. and several other investors seek permission for filing a class-action lawsuit against Morgan Stanley (MS), accusing it of selling risky debts via misleading statements. The plaintiffs sued Morgan Stanley, relating to the offering of collateralized debt obligations (CDOs) issued from Aug 1, 2006, to the end of 2007.
CDOs typically repackage bonds and other assets into new securities. These are not traded on a public exchange, allowing firms like Morgan Stanley to generate fees through brokering deals between buyers and sellers. However, CDOs have performed miserably since these were invested in securities comprising sub-prime mortgages, which are known to have larger-than-average risk of defaulting in the market. Eventually, the market downturn ruined the investment banker’s expectations, making common investors suffer huge losses.
The aforesaid lawsuit has been filed by the investors of Pinnacle notes issued by Morgan Stanley. The investors claim that the bank concealed the risk it took against its clients by taking short positions in CDOs, which were sold to the investors. Therefore, when these CDOs failed, the bank gained from the investment.
The complaints claimed that Morgan Stanley misrepresented the value of instruments by providing materially misleading statements. Moreover, these CDOs were related to various companies including Fannie Mae (FNMA), Freddie Mac (FMCC), Lehman Brothers Holdings Inc. and Washington Mutual Inc. The investors lost about $154.7 million, which were reinvested in these CDOs by Morgan Stanley.
Previously, the lawsuit was filed by Singapore investors in Oct 2010 in the Manhattan Federal Court.
The continuously increasing number of lawsuits is apprehended to dent Morgan Stanley’s reputation and its financials. However, investors, who have lost their hard-earned money in such investments, should feel relieved.
Among other banks, Citigroup Inc. (C), JPMorgan Chase & Co., HSBC Holdings Plc and M&T Bank Corp. have also been legally accused of distorting documents related to mortgage-backed securities and other losses.
Morgan Stanley currently retains a Zacks Rank #3 (Hold).
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