CDO Fraud Allegations Haunt Morgan Stanley

A group of Singapore investors are crying foul at Morgan Stanley, accusing the firm of misrepresenting a bond sale that had ties to collateralized debt obligations (CDOs). Filed in U.S. District Court in Manhattan, the investors allege that Morgan Stanley designed the synthetic CDOs in question to fail, even though it allegedly marketed them as “conservative” investments.

“It placed itself on the side guaranteed to win (the “short” side) and placed plaintiffs and the class on the side guaranteed to lose (the “long” side),” the 119-page complaint said. “(It) boils down to a classic bait-and-switch scheme.”

A similar lawsuit was filed earlier this year against Goldman Sachs. In that lawsuit, the Securities and Exchange Commission (SEC) accused Goldman of creating a CDO known as Abacus to benefit hedge fund investor John Paulson at the expense of other investors.

In July, Goldman paid $550 million to settle the SEC’s charges.