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S’pore Pinnacle Notes investors join class action

10/22/2013 | The Singapore Business Times
By Grace Leong

THOUSANDS of Pinnacle Notes retail investors in Singapore are now part of a US$154.7 million class-action suit brought against Morgan Stanley in New York after the US federal court last week gave the green light.

This means that every investor who bought into the seven series of Pinnacle Notes in question - even those who may not be aware of the case - will automatically be included in the class action.

If the lead plaintiffs win the case and recover money, then all class members will receive restitution based on the amount of their individual loss, including those who have already got partial compensation through the Financial Industry Disputes Resolution Centre (FIDReC).

In certifying the case as a class action, US District Judge Jesse Furman found that the plaintiffs have “put forth numerous issues that are common to the class, including whether defendants withheld information regarding the Pinnacle Notes’ underlying assets from the investors; whether defendants engaged in behaviour that constitutes bad faith”.

The plaintiffs alleged that they were defrauded through financial products that were collateralised, among other things, by sub-prime mortgages and Icelandic banks that later failed. These products were Pinnacle Performance Ltd series 1,2,3,6,7,9 and 10 notes issued between August 2006 and December 2007.

Judge Furman found that “the alleged misrepresentations and omissions here were so fundamental to the value of the notes that it is hard to imagine a reasonable investor purchasing them if the offering documents had revealed their true nature”.

“If plaintiffs had known that Morgan Stanley would select the ACES collateralised debt obligations (CDOs) - a risky asset whose depreciation would benefit a Morgan Stanley affiliate - as the source of funds that plaintiffs would receive in the absence of a reference entity credit event, it stands to reason that plaintiffs would not have purchased the notes in the first place.”

“Further, the (sales) brochures, which failed to disclose defendants’ conflict of interest, and included an allegedly misleading description of the underlying assets, contained the same allegedly misleading language across all seven series, were provided to all class members, and were reviewed by each of the plaintiffs making their purchasing decisions.”

In seeking class certification, the investors accused Morgan Stanley of perpetuating its scheme by deliberately omitting information about the notes’ structure that are “standard considerations of any reasonable investor”.

Morgan Stanley allegedly “laboured” to hide the true nature of the underlying assets or CDOs - that these were created by the bank and tied to entities such as Lehman Brothers, and that the bank stood to gain and the investors lose if these CDOs performed poorly.

Instead, the notes were marketed as safe, conservative investments and “an attractive alternative to bonds” because the reference entities - primarily highly-rated sovereign nations and blue-chip institutions such as Temasek Holdings - bore little risk of default, the investors alleged.

Daniel Hume of Kirby McInerney LLP said: “With this decision, plaintiffs can seek justice for themselves and all of their fellow Pinnacle investors who were harmed.”