Morgan Stanley & Co. was accused in a lawsuit by Hong Leong Finance Ltd. of Singapore of deceptively selling investments it had designed to fail.
Hong Leong said in a complaint filed today in federal court in Manhattan that it entered into a distribution agreement with the investment bank to sell about $72.4 million worth of the so- called Pinnacle notes created from August 2006 to December 2007. The notes later failed and the Singapore-based company was required to compensate customers for at least $32 million in losses, according to the filing.
Morgan Stanley sold the notes as relatively safe investments while rigging them to fail for its own benefit, Hong Leong claimed. Hong Leong describes itself as a local retail financial firm similar to a savings and loan association.
"Morgan Stanley secretly, deceptively and wrongfully invested the investors' principal in very risky underlying assets," according to the complaint, filed by David S. Stellings, a lawyer for Hong Leong.
Mary Claire Delaney, a spokeswoman for New York-based Morgan Stanley, declined to comment on the suit.
The investments at issue were described to the Singapore banking firm as synthetic collateralized debt obligations based on the performance of major corporations and sovereign nations with high credit ratings, according to the complaint.
Morgan Stanley instead tied the notes to much riskier investments in real estate-related companies and troubled Icelandic banks, including Glitnir Bank HF and Kaupthing Bank HF, the Singapore firm claimed.
Morgan Stanley issued the notes through a special-purpose entity it controlled called Pinnacle Performance Ltd., according to the complaint. The investment bank was also positioned to profit when the notes failed because it had entered into swap transactions with the noteholders through another affiliated entity, Morgan Stanley Capital Services Inc., the plaintiff claimed.
"When Morgan Stanley's 'rigged' underlying assets failed, money from customers was transferred to MS Capital," Hong Leong said in the complaint.
The suit asserts claims against Morgan Stanley including fraud, negligent misrepresentation and breach of contract.
In December, U.S. District Judge Leonard Sand ruled that the investment bank couldn't ask a court in Singapore to block investors from suing outside the country over losses in Pinnacle notes.
The case is Hong Leong Finance Ltd. v. Pinnacle Performance Ltd., 12-cv-6010, U.S. District Court, Southern District of New York (Manhattan).
The earlier case is Dandong v. Pinnacle Performance Ltd., 10-cv-08086, U.S. District Court, Southern District of New York (Manhattan).