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S'pore investors sue in US over doomed Pinnacle Notes
[2011] 09 Sep_BT
Title: S'pore investors sue in US over doomed Pinnacle Notes
(SINGAPORE) A lawsuit involving allegations that Morgan Stanley & Co Inc sold rigged Pinnacle Notes as 'safe, conservative' products to a group of Singaporean investors including Singapore's oldest credit cooperative, costing them US$154.7 million in investment losses, is making its way through federal court in Manhattan.
A hearing is scheduled for Sept 28 in which the US District Court for the Southern District of New York will decide whether the case can proceed in the US or whether it should be dismissed and heard in Singapore, The Business Times has learned.
If approved, the Singapore investors will seek class-action status.
The class potentially consists of thousands of investors who had bought Pinnacle Performance Ltd series 1,2,3,5,6,7,9 and 10 notes between Aug 1, 2006 and Dec 31, 2007.
According to court documents obtained by BT, Morgan Stanley and several affiliates were accused of defrauding 18 Singapore investors through financial products that were allegedly collateralised by sub-prime mortgages and Icelandic banks that later failed.
In a 119-page complaint, the 18 investors, including the Singapore Government Staff Credit Cooperative Society, said Morgan Stanley invested their funds in synthetic CDOs (collateralised debt obligations) of their own making, where the bank itself was allegedly a counterparty on underlying swap agreements.
The suit said this arrangement was structured to let Morgan Stanley gain one dollar for each dollar the investors lost.
'Morgan Stanley designed the synthetic CDOs to fail' so that the investors' funds could be redirected into its coffers, the suit said.
'The synthetic CDOs that Morgan Stanley created were not merely bets, but bets (it) rigged, in which it placed itself on the side guaranteed to win . . . and placed plaintiffs and the class on the side guaranteed to lose,' the suit said.
But Morgan Stanley, in a 53-page motion to dismiss, argued: 'Not only does the complaint fail to identify any false or misleading statements, but it also fails to plead the required strong inference of fraudulent intent.'
'The Pinnacle Notes' Base Prospectus contained extensive risk disclosures. The disclosures made clear that the Pinnacle Notes were sophisticated instruments, involved a high degree of risk, and could result in the loss of the entire principal amount invested,' it said.
'Investors were aware that Pinnacle Notes underlying assets could include synthetic CDO securities, and that the value of synthetic CDO securities could decline to zero,' it added.
Morgan Stanley also pointed to a July 2009 report by the Monetary Authority of Singapore (MAS) discussing Pinnacle Notes that 'explicitly noted that investors had been warned of this risk', and that they had 'acknowledged these risks at the time of purchase'.
'Based on the extensive risk disclosures, plaintiffs cannot now complain that they were not adequately warned of the Pinnacle Notes' risks, or that they reasonably relied on purportedly incomplete information,' it said.
According to the investors' lawsuit, the Pinnacle Notes were a type of credit- linked notes whose performance was linked to the creditworthiness of reference entities, primarily highly-rated sovereign nations such as Singapore, Australia, Hong Kong and blue-chip institutions including Singapore's Temasek Holdings, Citigroup, HSBC Bank, Standard Chartered, SingTel, UOB, OCBC and DBS Bank.
The notes were marketed as safe, conservative investments because the reference entities bore little risk of default.
Typically, the investors' principal is reinvested in underlying assets, whose purpose is to have money on hand should the reference entities default. To this end, these underlying assets tend to be stable securities that carry little risk of default, the suit said.
'In a normal case, the investment risk is based on the creditworthiness of the (credit-linked notes reference entities) while the security resides in the underlying assets,' the suit said.
But Morgan Stanley and its affiliates 'turned this relationship on its head, and rigged the underlying assets to default and to benefit themselves', the suit said.
'Not only did Morgan Stanley position itself as the party that stood to gain if the credit risk materialised, but it utilised its unilateral control over the structure of the synthetic CDOs to ensure this happened,' the suit said.
The underlying assets or synthetic CDOs' portfolios that Morgan Stanley allegedly created were 'seeded with reference entities that it deemed to present greater likelihood of default', the suit said.
These included Icelandic banks such as Glitnir, Kaupthing and Landsbanki, which Morgan Stanley allegedly included in its CDO portfolios in 2006 and 2007, even though the instability of Iceland's banks was public knowledge in early 2006, the suit said.
And for the later series of Pinnacle Notes, such as 9 and 10, Morgan Stanley Capital 'actually increased the percentage of companies susceptible to a housing downturn in the CDO reference entity portfolios at the same time the sub-prime crisis was worsening', the suit said.
Meanwhile, Morgan Stanley, in court papers, argued that the case should be transferred to Singapore because the Pinnacle Notes were marketed and sold through distributors in Singapore.
'The case at bar is a Singaporean dispute involving Singapore nationals, alleged activities in Singapore, and claims that should be resolved under Singapore law,' the US investment bank argued.
But Daniel Hume, the Singapore investors' lawyer, disagreed.
'The case is filed in the US because a lot of the evidence won't be in Singapore. The Pinnacle Notes products weren't designed or created out of Singapore,' he said.
S'pore investors sue in US over doomed Pinnacle Notes
[2011] 09 Sep_BT
Title: S'pore investors sue in US over doomed Pinnacle Notes
(SINGAPORE) A lawsuit involving allegations that Morgan Stanley & Co Inc sold rigged Pinnacle Notes as 'safe, conservative' products to a group of Singaporean investors including Singapore's oldest credit cooperative, costing them US$154.7 million in investment losses, is making its way through federal court in Manhattan.
A hearing is scheduled for Sept 28 in which the US District Court for the Southern District of New York will decide whether the case can proceed in the US or whether it should be dismissed and heard in Singapore, The Business Times has learned.
If approved, the Singapore investors will seek class-action status.
The class potentially consists of thousands of investors who had bought Pinnacle Performance Ltd series 1,2,3,5,6,7,9 and 10 notes between Aug 1, 2006 and Dec 31, 2007.
According to court documents obtained by BT, Morgan Stanley and several affiliates were accused of defrauding 18 Singapore investors through financial products that were allegedly collateralised by sub-prime mortgages and Icelandic banks that later failed.
In a 119-page complaint, the 18 investors, including the Singapore Government Staff Credit Cooperative Society, said Morgan Stanley invested their funds in synthetic CDOs (collateralised debt obligations) of their own making, where the bank itself was allegedly a counterparty on underlying swap agreements.
The suit said this arrangement was structured to let Morgan Stanley gain one dollar for each dollar the investors lost.
'Morgan Stanley designed the synthetic CDOs to fail' so that the investors' funds could be redirected into its coffers, the suit said.
'The synthetic CDOs that Morgan Stanley created were not merely bets, but bets (it) rigged, in which it placed itself on the side guaranteed to win . . . and placed plaintiffs and the class on the side guaranteed to lose,' the suit said.
But Morgan Stanley, in a 53-page motion to dismiss, argued: 'Not only does the complaint fail to identify any false or misleading statements, but it also fails to plead the required strong inference of fraudulent intent.'
'The Pinnacle Notes' Base Prospectus contained extensive risk disclosures. The disclosures made clear that the Pinnacle Notes were sophisticated instruments, involved a high degree of risk, and could result in the loss of the entire principal amount invested,' it said.
'Investors were aware that Pinnacle Notes underlying assets could include synthetic CDO securities, and that the value of synthetic CDO securities could decline to zero,' it added.
Morgan Stanley also pointed to a July 2009 report by the Monetary Authority of Singapore (MAS) discussing Pinnacle Notes that 'explicitly noted that investors had been warned of this risk', and that they had 'acknowledged these risks at the time of purchase'.
'Based on the extensive risk disclosures, plaintiffs cannot now complain that they were not adequately warned of the Pinnacle Notes' risks, or that they reasonably relied on purportedly incomplete information,' it said.
According to the investors' lawsuit, the Pinnacle Notes were a type of credit- linked notes whose performance was linked to the creditworthiness of reference entities, primarily highly-rated sovereign nations such as Singapore, Australia, Hong Kong and blue-chip institutions including Singapore's Temasek Holdings, Citigroup, HSBC Bank, Standard Chartered, SingTel, UOB, OCBC and DBS Bank.
The notes were marketed as safe, conservative investments because the reference entities bore little risk of default.
Typically, the investors' principal is reinvested in underlying assets, whose purpose is to have money on hand should the reference entities default. To this end, these underlying assets tend to be stable securities that carry little risk of default, the suit said.
'In a normal case, the investment risk is based on the creditworthiness of the (credit-linked notes reference entities) while the security resides in the underlying assets,' the suit said.
But Morgan Stanley and its affiliates 'turned this relationship on its head, and rigged the underlying assets to default and to benefit themselves', the suit said.
'Not only did Morgan Stanley position itself as the party that stood to gain if the credit risk materialised, but it utilised its unilateral control over the structure of the synthetic CDOs to ensure this happened,' the suit said.
The underlying assets or synthetic CDOs' portfolios that Morgan Stanley allegedly created were 'seeded with reference entities that it deemed to present greater likelihood of default', the suit said.
These included Icelandic banks such as Glitnir, Kaupthing and Landsbanki, which Morgan Stanley allegedly included in its CDO portfolios in 2006 and 2007, even though the instability of Iceland's banks was public knowledge in early 2006, the suit said.
And for the later series of Pinnacle Notes, such as 9 and 10, Morgan Stanley Capital 'actually increased the percentage of companies susceptible to a housing downturn in the CDO reference entity portfolios at the same time the sub-prime crisis was worsening', the suit said.
Meanwhile, Morgan Stanley, in court papers, argued that the case should be transferred to Singapore because the Pinnacle Notes were marketed and sold through distributors in Singapore.
'The case at bar is a Singaporean dispute involving Singapore nationals, alleged activities in Singapore, and claims that should be resolved under Singapore law,' the US investment bank argued.
But Daniel Hume, the Singapore investors' lawyer, disagreed.
'The case is filed in the US because a lot of the evidence won't be in Singapore. The Pinnacle Notes products weren't designed or created out of Singapore,' he said.
