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Morgan Stanley Wants Sing-a-poor to Disappear

04/21/2011 | New York Post
by John Crudele

Morgan Stanley is trying hard to keep a potentially embarrassing lawsuit, filed on behalf of a group of Singapore investors, from being heard in the US.

The investors — regular folks who risked their pension money — are claiming they were cheated out of $158 million when Morgan Stanley created a security filled with collateralized debt obligations (CDOs) that they allege was designed to go broke and benefit the company.

CDOs, which are exotic securities that invest in credit default swaps and other things, have been front and center throughout the financial crisis. But this case introduces another plot line: average people in another country who say they were screwed by an American firm.

The security in this case went by the name Pinnacle Performance Ltd. It wasn’t sold directly by Morgan Stanley in the Far East but instead was marketed through independent brokers, who aren’t being sued. That’s why the question of jurisdiction — where the trial should be held — now needs to be determined.

And since investor protections are stronger in the US than in Singapore, not to mention in many other parts of the world, the Pinnacle investors want this case heard here in a federal court. Morgan Stanley would prefer Singapore, if the case survives its legal challenges.

Lawyers for the investors filed a motion in court this week; Morgan Stanley has six weeks to reply. The investors should know before mid-summer whether Judge Leonard B. Sand will let the case proceed. “Morgan Stanley created a safe looking investment product that was marketed in a way to look safe,” the investors’ lawyer, Dan Hume, of Kirby McInerney, told me the other day. “We think this is basically a bait and switch.”

Hume said the typical Singapore investor put an average of $150,000 into Pinnacle -- not a lot by Wall Street standards, but it represented much of the investors’ retirement money. Morgan Stanley declined comment for this column.

The Pinnacle case could have a much greater importance beyond this small group of investors. Morgan Stanley created other securities like this that were sold overseas, as did other Wall Street firms.

These accusations are similar to ones against Morgan Stanley that US authorities already seem to be investigating. The Wall Street Journal reported last year that US prosecutors were looking to see if Morgan Stanley misled investors about mortgage derivative deals, specifically CDOs.

But that investigation, which the Journal said back then was at the preliminary stage, seemed to concern itself only with domestically-sold securities. So, too, did an earlier Securities & Exchange Commission probe of several Wall Street firms that dealt with these exotic securities.

Nothing new has come out about the criminal investigation reported by the Journal. Most of the people who purchased CDOs in the US were considered sophisticated investors who — Wall Street firms have argued — should have realized the risk.

But the case out of Singapore — which hasn’t gotten much notice until now — is quite different since the investors may not have had the level of sophistication required under US law to have made the investments they did.