Less than a month after the Securities and Exchange Commission launched its lawsuit
Goldman Sachs for allegedly defrauding investors into bad investments,
U.S. prosecutors are investigating whether Morgan Stanley undertook similar practices. The investigation comes at an especially bad time
for Morgan, one of eight banks currently under a separate
by the New York Attorney General for allegedly
misleading rating agencies. The timing is less problematic for the White
House and Congressional Democrats, who are pursuing legislation on
financial regulatory reform
Being Investigated The Wall Street Journal
summarizes, "U.S. prosecutors are investigating whether Morgan
Stanley misled investors about mortgage-derivatives deals it helped
design and sometimes bet against. ... Morgan Stanley arranged and
marketed to investors pools of bond-related investments called
collateralized-debt obligations, or CDOs, and its trading desk at times
placed bets that their value would fall." By betting against its own
CDOs, Morgan Stanley stood to benefit if its CDO performed poorly. But
if Morgan knew the CDO would perform poorly, does that mean it defrauded
investors it lured into buying those CDOs?
- Why This Would Be a
Tough Case The New York Times' DealBook explains, "Wall Street
deals are notoriously difficult targets for prosecutors to level
charges over as it must be demonstrated beyond reasonable doubt that the
firm knew what it was doing when clients were misinformed. The
investigation into Morgan Stanley is at a very early stage."
Investigation Since 2009, Now Heightened The Wall Street Journal's
Ashby Jones writes, "federal
prosecutors are taking quite the keen interest in Wall Street. ... The
investigation grew out of an ongoing civil-fraud investigation launched
by the Securities and Exchange Commission in 2009, examining the
mortgage-bond business of more than a dozen Wall Street firms, the
people say. The Manhattan U.S. Attorney’s office now is investigating
some of those firms’ activities in a criminal probe."
Not SEC? The Business Insider's Joe Weisenthal points out,
"The probe is preliminary, according to the report, and at the level of
the Manhattan DA's office, so we're talking criminal, not civil from
- What Wall Street Investigators Are Going After
Reuters' Felix Salmon observes, "The
Dead Presidents CDOs now reportedly being investigated by the Justice Department were not your
garden-variety synthetics. ... There were lots of synthetic CDOs
structured and sold at the end of the subprime boom, but the ones being
singled out by regulators and prosecutors seem to be the unusual ones —
first the Goldman deal which was created at the behest of John Paulson,
and now the Morgan Stanley deal with this mysterious embedded
- Does This Implicate Citigroup and UBS?
ProPublica's Marian Wang notes, "the CDOs
were actually marketed and sold not by Morgan Stanley but by Citigroup
and UBS. This leads to questions about whether Citigroup and UBS made
the necessary disclosures about Morgan Stanley’s involvement and
interests, which were adverse to those of investors." There are two
Morgan Stanley CDO deals being investigated, one underwritten by Citi
and the other by UBS. Will those banks be investigated as well?
Want to add to this story? Let us know in comments
or send an email to the author at
mfisher at theatlantic dot com.
You can share ideas for stories on the Open Wire.