Morgan Stanley

MBIA Can Sue Morgan Stanley Over Alleged Misrepresentation of MBS Risks, Says US New York Supreme Court

Published on: June 14, 2011 | by Shepherd Smith Edwards & Kantas, LLP

In MBIA Insurance Corp. v. Morgan Stanley, N.Y. Sup.Ct., No. 29951-10, the New York Supreme Court says that insurance company MBIA can sue Morgan Stanley and affiliates Saxon Mortgage Services Inc. and Morgan Stanley Mortgage Capital Holdings LLC for alleged misrepresentations about the risks involved in insuring residential mortgages that were sold to investors as mortgage-backed securities. While Judge Gerald Loehr allowed MBIA to bring a cause of auction for fraud against the broker-dealer and its affiliates, he did dismiss an unjust enrichment claim against Saxon.

MBIA claims that the defendants made their representations in their talks leading up to the agreement that had the insurer saying it would insure over $223 million in residential MBS that investors bought in the transaction. The alleged misstatements were over the characteristics of the mortgage loans (both pooled and individual), the quality of the collateral for the loans, and borrowers’ credit ratings. The action dealt with the securitization of a transaction involving about 5,000 subordinate-lien residential mortgages that were bought, structured, and sold by the defendants. Morgan Stanley is also accused of representing to MBIA that the mortgage loans weren’t subprime loans but were instead alternative documentation loans.

MSMCH had acquired the mortgage loans and then transferred and pooled them to Morgan Stanley Capital Inc., which then transferred them to a trust that had LaSalle Bank National Association serve as a trustee. The trust put out certificates secured by groups of those mortgages, which were sold, and paid a yield to certificate holders connecting the cash flow to the loans.

More Blog Posts:

Goldman Sachs Group Made Money From Financial Crisis When it Bet Against the Subprime Mortgage Market, Says US Senate Panel, Institutional Investor Securities Blog, April 15, 2011

Ex-Morgan Stanley Trader to Settle SEC Unauthorized Swaps Trading Claims for $150,000

Published on: June 13, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Larry Feinblum, an ex-Morgan Stanley & Co. Inc. (MS) trader, has consented to settle for $150,000 SEC allegations that he hid from risk managers the true extent of risk involved in certain proprietary trading. This move caused the financial firm to suffer about $24.47 million in losses when it unwound the unauthorized positions.

The SEC claims that over a 3-month period in 2009, Feinblum, who was a supervisor on Morgan Stanley’s Equity Financing Products Swaps Desk, and trader Jennifer Kim executed a number of transactions that set up net risk positions that were significantly over limits that “could be exceeded only with supervisory approval.” The two are also accused of submitting swap orders into the firm’s risk management system that they never planned on executing and which they then promptly canceled.

The SEC says that not only did Feinblum and Kim set up their arbitrage trading strategy at positions that exceeded Morgan Stanley’s risk limits, but they also submitted the orders for the purpose of artificially and temporarily lowering the net risk positions in the securities as recorded in the firm’s risk management systems. They also went after a trading strategy that was supposed to create a profit from price discrepancies between foreign markets and US markets.

On December 17, 2009, Feinblum, who had just lost $7 million the day before, admitted that he and Kim had gone beyond the risk limits on repeated occasions and that they hid their misconduct. Morgan Stanley then proceeded to unwind the positions but by then they had already taken the financial hit.

Related Web Resources:
Former Morgan Stanley Trader Barred for Bogus Swaps, Securities Technology Monitor, June 2, 2011
SEC: Morgan Stanley trader’s trick caused millions in losses, The Washington Post, June 2, 2011
SEC Administrative Proceeding

More Blog Posts:
China-Based Hackers Broke into Morgan Stanley Network, Reports Bloomberg, Stockbroker Fraud Blog, February 28, 2011
Morgan Stanley Failed to Disclose Financial Adviser’s Felony Charge to FINRA, Claims Car Accident Victim’s Attorney, Stockbroker Fraud Blog, January 10, 2011
Morgan Stanley & Co. and TD Ameritrade Inc. to Repurchase Over $338M in Auction Rate Securities from New Jersey Investors, Institutional Investor Securities Blog, May 4, 2011 Continue Reading ›

Morgan Stanley & Co. and TD Ameritrade Inc. to Repurchase Over $338M in Auction Rate Securities from New Jersey Investors

Published on: May 4, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley & Co. Inc. (MS) and TD Ameritrade Inc. (AMTD) will buy back over $338 million in auction rate securities from New Jersey investors. The repurchase is to settle securities allegations by the state’s attorney general that the financial firms did not adequately disclose the risks involved with investing in ARS.

Per the settlement, Morgan Stanley (the ARS underwriters) will repurchase $322.27 in ARS that it sold to retail investors and pay civil penalties of $1.56 million. The New Jersey Bureau of Securities claims that not only did the financial firm fail to tell investors of the risks involved in the financial instruments—even after knowing the ARS market was in trouble—but Morgan Stanley also failed to adequately train financial advisers and brokers about the possible illiquidity that could impact ARS.

TD Ameritrade (the ARS distributor) will buy back $16.1 million in ARS. The bureau claims that the broker-dealer’s registered representatives failed to inform clients of the risks involving ARS.

In a release issued late last month, Thomas R. Calcagni, Acting Director of the Division of Consumer Affairs, said that efforts have led to financial firms either buying back or offering to repurchase over $2.7 billion in ARS. The settlements with Morgan Stanley and TD Ameritrade are the ninth and tenth ones that the Division has reached with firms that sold ARS to investors. Earlier this year, UBS agreed to buy back $1.5 billion in ARS from New Jersey investors.

Morgan Stanley Consent Order (PDF)

TD Ameritrade Consent Order (PDF)

More Blog Posts:
Anschutz Corp.’s Securities Fraud Lawsuit Against Deutsche Bank and Credit Rating Agencies Over Their Alleged Mishandling of Auction-Rate Securities Can Proceed, Says District Court, Institutional Investor Securities Blog, April 21, 2011

Class Auction-Rate Securities Lawsuit Against Raymond James Financial Survives Dismissal, Stockbroker Fraud Blog, September 27, 2010

China-Based Hackers Broke into Morgan Stanley Network, Reports Bloomberg

Published on: February 28, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to Bloomberg, Morgan’s Stanley‘s network experienced a cyber break-in. The culprits were hackers based in China that broke into Google Inc.’s computers over a year ago. The break-in is documented in e-mails stolen from HBGary Inc, a cyber-security company that works for the investment bank.

Known as the Operation Aurora attacks, the break-ins took place in June 2009 and lasted for about six months. More than 20 companies were hit.

The HBGary emails don’t detail what data might have been stolen from Morgan Stanley or which of its multinational operations were hit. The broker-dealer reportedly considers the details of the cyber attacks confidential. Hacker activist group Anonymous stole the emails.

Morgan Stanley hired HBGary last year because of suspected hacker-linked network breaches that resulted in break-ins into the financial firm’s Internet security system. These attacks were not related to Operation Aurora. Per HBGary emails, the hackers that made those breaches were able to implant software for stealing confidential files and communications.

According to FBI Deputy Assistant Director Steven Chabinsky, hackers have stepped up efforts to obtain information involving mergers and acquisitions. The China-based hacker attacks did not help the growing tensions between China and the United States. Calls were even made for Secretary of State Hillary Clinton to look at Google’s claims about the raids and make her findings available to the public.

Following the cyber attacks, Google stopped censoring search results from Google.cn, its Chinese search engine. Google started shuttering its site following lengthy negotiations with officials in China.

Related Web Resources:
Morgan Stanley Attacked by China-Based Hackers Who Hit Google, Bloomberg, February 28, 2011
Operation Aurora, Techie Buzz, January 15, 2010
HBGary

More Blog Posts:
Morgan Stanley Failed to Disclose Financial Adviser’s Felony Charge to FINRA, Claims Car Accident Victim’s Attorney, Stockbroker Fraud Blog, January 10, 2011
Wall Street Knew 28% of the Loans Behind Mortgage Backed Securities (MBS) Failed to Meet Basic Underwriting Standards, Stockbroker Fraud Blog, January 10, 2011 Continue Reading ›

Kentucky Workers’ Compensation Funding Commission Paid Morgan Stanley Smith Barney $510,000 for Financial Advice, Says Auditor

Published on: February 23, 2011 | by Shepherd Smith Edwards & Kantas, LLP

State auditor Crit Luallen is accusing the Kentucky Workers’ Compensation Funding Commission of breaking the law when, rather than seeking financial advice from the Kentucky Finance and Administration Cabinet’s Office of Fiscal Management, it paid Morgan Stanley Smith Barney for private financial advice. Luallen contends that the workers’ compensation agency has paid the broker-dealer about $510,000 for help received in making investments since 1999. The funding commission’s board has accepted the audit’s findings and it will only work with state-employed advisers from now on.

The Kentucky Workers’ Compensation Funding Commission oversees over $350 million in assets. It collects over $70 million annually from assessments on employers’ workers’ compensation premiums. The funding commission’s investments suffered $71 million in lost investments during the fiscal years of 2009 and 2008.

There has been no evidence that there were any conflicts of interest between Morgan Stanley and the funding commission. The broker-dealer is defending its handling of the agency’s investments. Morgan Stanley senior vice president Frank Thompson says the firm did an “outstanding job” and that it strongly recommended that the funding commission not work with the state’s OFM, which it said proposed poor investments.

Related Web Resources:

Kentucky Workers’ Compensation Panel Criticized Over Outside Adviser, Insurance Journal, February 22, 2011 Continue Reading ›

Morgan Stanley Failed to Disclose Financial Adviser’s Felony Charge to FINRA, Claims Car Accident Victim’s Attorney

Published on: January 10, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to Harold Haddon, the civil attorney for car accident victim Dr. Steven Milo, Morgan Stanley (MS) failed to disclose to the Financial Industry Regulatory Authority that financial adviser Martin Erzinger had been charged with a felony. Securities firms have 30 days from the time anyone working for them is charged with a felony to file a “Form U4” notifying FINRA.

Erzinger, who works with approximately $1 billion in accounts, was charged with a felony after he struck bicyclist Steven Milo in a car crash last July and then fled the collision site. Milo sustained serious injuries in the traffic crash. In December, the Morgan Stanley Smith Barney financial adviser struck a plea agreement. The felony charge against him was dropped and he pleaded guilty to misdemeanors. Erzinger claimed that at the time of the auto accident, he was suffering from undiagnosed sleep apnea, fell asleep at the steering wheel, and did not realize that he had hit anyone with his vehicle.

Erzinger was sentenced to community service and probation. Judge Fred Gannett also ordered him to tell FINRA about the felony charge. Attorney Haddon, however, says the court-ordered disclosure, which was submitted on December 22, doesn’t meet requirements because it only reveals that Erzinger was charged with a felony crime that was later dropped but does not mention the financial adviser’s misdemeanor guilty pleas or the sentence he must now serve.

Milo had opposed the plea agreement. Dow Jones Newswires reports that in court, Milo’s father-in-law Tom Marisco, who founded Marisco Funds and used to manage Janus mutual funds, blamed Morgan Stanley for not making the disclosures, which are mandatory. Morgan Stanley, however, says it contacted FINRA about the issue last July and believes that it satisfied all reporting requirements.

FINRA spokesperson Nancy Condon says the only way to notify FINRA about a reporting requirement is to electronically submit a Form U4.

Related Web Resources:
Lewis: Simple question tough for Morgan Stanley to answer, Denver Post/Dow Jones, January 8, 2010
Financial manager Martin Erzinger to accept plea bargain in Vail hit-and-run, 9News, November 2010
Form U4 Checklist, FINRA
Institutional Investors Securities Blog
Continue Reading ›

Ex-Financial Adviser Pleads Guilty to Unauthorized Trading Involving Disabled Children’s Assets

Published on: December 28, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Charles Winitch has pleaded guilty to involvement in a securities fraud scam that victimized disabled children. In the U.S. District Court for the Southern District of New York, the ex-financial adviser and “wealth manager” entered a guilty plea to the charge of wire fraud involving unauthorized trading for commissions. While federal prosecutors and United States Attorney for the Southern District of New York Preet Bharara did not name the financial firm that Winitch had been working for at the time, The New York Daily News identified him in 2008 as a stockbroker with Morgan Stanley.

WInitch is accused of taking $198,784 from a trust held by the guardians of disabled children called the Guardian Account. The trust, which is supposed to provide children with long-term income and comes from the youths’ medical malpractice settlements, was only supposed to invest in New York Municipal Bonds or US Treasury Bonds. However, Winitch made unauthorized trades in 11 accounts in the millions of dollars to generate higher commissions even though he lacked the authority or consent to take such actions. According to Bharara, Winitch and co-conspirators made about $198,000 in ill-gotten commissions. Meantime, the fund lost somewhere between $400,000 and $1 million.

Winitch’s criminal defense lawyer says that the former stockbroker did not know that the accounts contained the money of disabled kids. The ex-Morgan Stanley broker is facing up to 63 months behind bars, hefty fines, forfeiture of ill-gotten gains, and restitution. Continue Reading ›

Morgan Stanley’s Motion to Bar Ex-Hedge Fund Promoter Conrad Seghers from Pursuing FINRA Arbitration in Texas Securities Case is Granted by District Court

Published on: October 27, 2010 | by Shepherd Smith Edwards & Kantas, LLP

A district court has granted plaintiff Morgan Stanley’s motion that Conrad Seghers, a former hedge fund promoter, be preliminarily barred from pursuing Financial Industry Regulatory Authority arbitration proceeding against the broker-dealer over the way over his accounts were allegedly mishandled. Judge Denise L. Cote said that Seghers waved the right to arbitrate by proceeding with his Texas securities lawsuit when he litigated with earlier action. The dispute between the investment bank and Seghers has been going on for nearly a decade.

According to the court, a number of hedge funds and related entities run by Seghers and his associates opened accounts with Morgan Stanley in 1999. In 2001, Seghers and his partners accused the broker-dealer of serious errors that allegedly caused the funds’ value to sustain huge financial hits. A major investor in a Segher hedge fund would go on to file a Texas securities fraud complaint against the fund promoter, the funds, and his partners.

The following year, a number of the funds sued Morgan Stanley in court. The Texas securities dispute went to NASD (now FINRA) arbitration and the case was eventually settled.

When Seghers sued Morgan Stanley for $35 million in federal court over the investment bank’s allegedly fraudulent misstatements that led to the funds to drop in value, the lawsuit was dismissed as untimely under the Texas limitations period of four years. Seghers chose not to appeal the ruling.

However, not long after, one of the funds founded by Seghers that had traded assets through the Morgan Stanley accounts filed NASD arbitration proceedings accusing the investment bank of breach of contract and fraud related to the same alleged misconduct as the federal district court action. A court in New York dismissed the case as untimely.

This April, Seghers commenced a FINRA arbitration against Morgan Stanley. In July, the investment bank filed a complaint seeking declaratory judgment that the hedge fund promoter waived his right to arbitrate because of his earlier lawsuit, as well as due to the fact that the Texas arbitration was time-barred. The court granted Morgan Stanley’s motion.

Related Web Resources:
Arbitration and Mediation, FINRA Continue Reading ›

In Securities Fraud Case Against Morgan Stanley Pension Fund Doesn’t Have Standing to Bring Certain Claims, Says Court

Published on: October 4, 2010 | by Shepherd Smith Edwards & Kantas, LLP

A US district court judge has issued a ruling in the securities fraud lawsuit against Morgan Stanley and several affiliates. The case, which was brought by West Virginia Investment Management Board (WVIMB), involves mortgage-backed securities.

WVIMB, which bought securities from Morgan Stanley Mortgage Loan Trust 2007-11AR, had filed class claims against securities bought under the trust claiming that the defendants had violated federal securities laws when making mortgage-backed securities sales. However, WVIMB wanted to expand the claims to include 30 other loan trusts even though it hadn’t bought securities from them.

Morgan Stanley and its affiliates contended that WVIMB did not have the legal standing to pursue claims on certificates it didn’t buy. They also said that the plaintiff waited too long to file its claims on Trust 2007-11AR. The court agreed.

According to Judge Laura Taylor Swain’s decision, pension funds do not have standing to bring certain claims, and, at least in court, there will be a distinction made between loan trusts that have separate prospectus supplements even if they have the same shelf registration statement. The court also noted that the pension fund had enough information that it could and should have filed its securities lawsuit sooner. Swain’s decision narrowed the pension fund’s claims that the defendants affiliates violated federal securities laws when making mortgage-backed securities sales.

Mortgage-Backed Securities
Many securities fraud lawsuits that have been filed over the alleged wrongdoings related to the marketing, packaging, and sale of mortgage-backed securities. Retirement funds, pension funds, and other investors are among those that have sued investment firms and banks for misleading them about these securities and failing to reveal the true degree of risk involved in investing in them.

Related Web Resources:
West Virginia Investment Management Board

Wall Street Knew 28% of the Loans Behind Mortgage Backed Securities (MBS) Failed to Meet Basic Underwriting Standards

Published on: September 29, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Testimony and documentation provided to the Financial Crisis Inquiry Commission (FCIC) by Clayton Holdings, a due diligence company, revealed that as much as 28% of the loans failed to meet basic underwriting guidelines. According to the testimony given to the FCIC, only 54% of the loans met the lender’s underwriting guidelines and 28% were outright failures.

Unfortunately, about 40% of these bad loans went into securitized pools sold to investors. This information, provided to Wall Street banks, was ignored when they purchased these loans, then bundled into mortgage backed securities and sold to others. Furthermore, rating agencies Moody’s, Standard & Poor’s and Fitch, all charged with assessing the risks of securitized pools, ignored conclusive evidence that many of the loans failed to meet underwriting standards.

Loan originators profited, as did unscrupulous appraisers, then Wall Street firms and the rating agencies shared in the greed by packaging the overrated risky pools. The victims were unsuspecting investors, including individual investors, pension funds, municipalities and U.S. housing agencies, as well as overseas countries, banks and other foreign investors.

In the wake of this subprime mortgage fraud process and the collapse of the housing market, accusations of the chain of greed concerning mortgage backed securities (MBS) has now been confirmed: The toxic nature of the securities was known by Wall Street but simply ignored for the sake of profits.

In a related matter, Morgan Stanley accused of deceptive practices by the Massachusetts Attorney General by knowingly placing dubious mortgages into securitized pools. The facts in that case relied on Clayton reports of loan quality commissioned by Morgan Stanley. The firm settled for $102 million.

References:

Financial Crisis Inquiry Commission, www.fcic.gov
Raters Ignored Proof of Unsafe Loans, New York Times, Gretchen Morgenson; September 26, 2010
New Proof Wall Street Knew Its Mortgage Securities Were Subpar, Huffington Post, September 25, 2010
Attorney General of Massachusetts, www.mass.gov Continue Reading ›