) has been charged by a Singapore-based firm, Hong Leong Finance
Ltd., of selling structured notes that were deliberately designed
to fail. About six years ago, Hong Leong had entered into a deal
with the company to sell Pinnacle notes (issued from August 2006 to
December 2007) valued at approximately $72.4 million (S$89.8
million) to the customers.
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Hong Leong alleged that though Morgan Stanley had sold the Pinnacle
notes as secure investments, the company had manipulated these in
such a way that Morgan Stanley would benefit from its failure. The
notes eventually failed and Hong Leong had to pay nearly $32
million as compensation to the investors. The company had sold
these notes through a special purpose vehicle, Pinnacle Performance
Hong Leong has accused Morgan Stanley of fraud, breach of contract
and omission of correct information. The firm further alleged that
while entering into the distribution agreement for selling Pinnacle
notes, Morgan Stanley had described the underlying assets as
synthetic collateralized debt obligations (CDOs) tied to the
performance of major global firms and sovereign nations with high
However, Morgan Stanley had actually based the notes on risky
investments primarily in real estate-related firms and distressed
Icelandic banks. Also, the company was to gain from the failure of
the notes as it had entered into a swap deal with the holders of
Pinnacle notes through its affiliate, Morgan Stanley Capital
Last year, a U.S. District court had dismissed an appeal by Morgan
Stanley seeking permission for preventing investors from suing it
from outside the country related to the losses incurred due to the
failure of Pinnacle notes.
Morgan Stanley is not the only bank that had to face the wrath of
the investors for the soaring of similar offerings. Over the last
couple of years, a few of the major banks including
The Goldman Sachs Group Inc.
JPMorgan Chase & Co.
) agreed to pay about $1 billion in total to settle Securities
& Exchange Commission (SEC) litigations related to such
We believe that these litigations will adversely impact Morgan
Stanley's financial credibility. This would also deter the company
from repeating such acts again. However, the investors who were
duped of their hard earned money will get some respite.
Morgan Stanley currently retains a Zacks #3 Rank, which translates
into a short-term Hold rating. Considering the fundamentals, we
also maintain our long-term Neutral recommendation on the