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Morgan Stanley Bet That Went Awry Has Junior Trader at Center

Stefania Spezzati, Donal Griffin and Viren Vaghela

(Bloomberg) -- The trades at the heart of a probe that’s now rocking Morgan Stanley’s currency desks were bets linked to the Turkish lira managed by a 27-year-old trader.

The firm is investigating suspected mismarking of securities to conceal losses of as much as $140 million in a portfolio handled day-to-day by London-based Scott Eisner, a 2014 Yale University graduate and associate at the firm, according to people with knowledge of the matter. Morgan Stanley has already fired or placed on leave a handful of traders in connection with the incident, said the people, who asked not to be named discussing confidential information.

The wager was tied to the Turkish lira, the people said, a currency that whipsawed investors in 2018 and earlier in 2019 amid mounting political tensions. Those swings caused issues for a number of firms across the financial industry, and now Morgan Stanley is grappling with how its losses happened and whether there were efforts to cover them up.

At least three other traders have been swept up in the probe, including foreign-exchange options trader Rodrigo Jolig, also based in London. Two senior colleagues, Thiago Melzer and Mitchell Nadel, are based in New York. Their ultimate employment status isn’t yet clear, but at least some of them are leaving the bank, the people said. Eisner declined to comment, as did Nadel. The other traders didn’t return calls seeking comment.

Morgan Stanley’s internal probe is ongoing and it’s unclear what the ultimate findings will be. It’s also uncertain how much autonomy Eisner had on the trades or if he was following directives from superiors. A spokesman for Morgan Stanley declined to comment.

The Turkish lira has tripped up Wall Street traders in the last couple of years as the currency fluctuated with the country’s volatile politics. BNP Paribas SA and Barclays Plc were among lenders that lost tens of millions of dollars last year amid wild swings in prices on Turkish assets while Citigroup Inc. faced losses of up to $180 million on a loan to a client that had made wrong-way bets linked to the currency.

Traders were caught again in March amid uncertainty in the days running up to an election that tested support for President Recep Tayyip Erdogan, and the cost of borrowing liras overnight soared past 1,000 percent. Volatility in the currency has since calmed to its lowest in more than a year.

In so-called mismarking, the value placed on securities doesn’t reflect their actual worth. The scope of the probe at Morgan Stanley includes currency options that give buyers the right to trade at a set price in the future, enabling them to both speculate and hedge against potential losses, the people said. Dealing in foreign-exchange options surged 16% to $294 billion per day in April, according to the most recent data from the Bank for International Settlements.

Morgan Stanley’s currency options desk has struggled this year amid a slump in the volatility that generates profits for traders, even in the more unruly emerging markets, according to a person with knowledge of the performance. The JPMorgan Global FX volatility index trades at the lowest since the summer of 2014.

It has been a turbulent week for securities firms in London and New York after Citigroup was fined 44 million pounds ($57 million) by the Bank of England for years of inaccurate reporting to regulators about the lender’s capital and liquidity levels. The incidents point to weak internal controls at investment banks a decade on since the financial crisis.

Natixis SA, the French lender roiled by risk-management problems since last year, has suspended a senior trader at a subsidiary in New York pending an internal investigation, Bloomberg News reported this week.

Officials at the French bank are reviewing issues around how some of the senior trader’s transactions have been recorded, the people said. The bank is also examining how he managed his portfolio of trades, they said, requesting anonymity as the details aren’t public.

--With assistance from Silla Brush and Michelle F. Davis.

To contact the reporters on this story: Stefania Spezzati in London at sspezzati@bloomberg.net;Donal Griffin in London at dgriffin10@bloomberg.net;Viren Vaghela in London at vvaghela1@bloomberg.net

To contact the editors responsible for this story: Ambereen Choudhury at achoudhury@bloomberg.net, ;Michael J. Moore at mmoore55@bloomberg.net, Sree Vidya Bhaktavatsalam

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