Morgan Stanley Accused of Defrauding Investors

(January 5, 2010) – A Virgin Islands pension fund has accused Wall Street bank Morgan Stanley of marketing $1.2 billion of risky mortgage-related notes that it believed would fail, according to Reuters.

The Dec. 24 complaint brought by the public employees’ pension system of the Virgin Islands alleges that Morgan Stanley was “shorting” nearly all the assets that it in turn was selling to institutional investors. The bank was therefore motivated to defraud investors with positive ratings, aware the CDO assets were suffering from an increase in delinquencies and were riskier than the ratings indicated, the suit says.

The CDOs were backed by securities issued by subprime lenders, including bankrupt New Century Financial Corp. and Option One Mortgage Corp. The lawsuit seeks remedies including class-action status, as well as compensatory and punitive damages.

This lawsuit is but the latest in a string of accusations against financial institutions following the 2008 financial crisis. In the most recent iteration, a union pension plan sued financial giant Goldman Sachs over its 2009 bonus pool.