New York: US federal investigators are probing whether investment banking major Morgan Stanley misled investors about mortgage-derivative deals, says a media report.
“Federal prosecutors are investigating whether Morgan Stanley misled investors about mortgage-derivative deals it helped design and sometimes bet against,” The Wall Street Journal reported citing people familiar with the matter.
Morgan Stanley arranged and marketed to investors pools of bond-related investments called “collateralised debt obligations,” or CDOs, and its trading desk at times placed bets that their value would fall, the report said attributing to traders.
Investigators are examining, among other things, whether Morgan Stanley made proper representations about its roles in the mortgage-derivatives deals, it added.
According to the publication, two of the transactions that have been scrutinised were named after US Presidents James Buchanan and Andrew Jackson and were termed as “Dead Presidents” deals by traders.
Morgan Stanley helped design the deals and bet against them, but did not market them to clients, the report noted.
The company made money on the Dead President deals, although it lost $9 billion on mortgage bets in 2007, the daily said.
The investigation grew out of an ongoing civil-fraud investigation launched by the Securities and Exchange Commission (SEC)in 2009, examining the mortgage-bond business of more than a dozen Wall Street firms.
“We have not been contacted by the Justice Department about the transactions being raised by The Wall Street Journal and we have no knowledge of a Justice Department investigation into these transactions,” the report quoted a Morgan Stanley spokesman as saying.
Last month, Goldman Sachs was charged by SEC with defrauding and causing an alleged loss of over $1 billion to investors by misrepresenting facts about a financial product tied to sub-prime mortgages.