Probe looks at whether bank misled investors about mortgage derivatives
Reuters
updated 7:26 a.m. CT, Wed., May 12, 2010

TOKYO - U.S. federal investigators are probing whether Morgan Stanley misled investors about mortgage derivative products it helped create and sometimes bet against, The Wall Street Journal said, citing people familiar with the matter.

Shares in the bank fell more than 3 percent to $27.38 in premarket trading Wednesday.

Morgan Stanley Chief Executive James Gorman told media in Tokyo he had no knowledge of any federal investigation into his firm.

"We have not been contacted by the Justice Department about any transactions that were raised in The Wall Street Journal article," Gorman said at a joint news conference with Mitsubishi UFJ Financial Group.

"We have no knowledge whatsoever about the Justice Department investigation."

The report comes less than a month after Morgan Stanley rival Goldman Sachs was charged with fraud by the U.S. Securities and Exchange Commission over its marketing of a subprime mortgage product known as ABACUS.

Morgan Stanley arranged and marketed to investors pools of bond-related investments called collateralized debt obligations (CDOs), and its trading desk at times placed bets that the value of the CDOs would fall, The Wall Street Journal said, citing traders.

Federal investigators are examining whether Morgan Stanley made proper representations about its roles in the mortgage derivative deals, the newspaper said.

'Dead Presidents' deals
Two particular deals -- named after U.S. Presidents James Buchanan and Andrew Jackson -- were scrutinized by the investigators, the paper said, citing a person familiar with the matter.

Morgan Stanley helped design the deals and bet against them, but did not market them to clients, according to the paper.

Traders called them the "Dead Presidents" deals, the Journal said. The firm made money on those deals, but any profit was far overshadowed by the $9 billion the firm lost on bullish mortgage bets in 2007, the paper said.

"Yes, we have looked into the situation internally," Gorman said when asked in Tokyo about the "Dead Presidents" deals.

"We have no reason to believe there is any substance behind any supposed investigation that appeared in The Wall Street Journal article this morning."

Spokesmen for the federal prosecutor's office in New York and the SEC declined to comment to the Journal.

The SEC and the prosecutor's office could not be immediately reached for comment by Reuters outside regular U.S. business hours.

http://www.msnbc.msn.com/id/37104096/ns/business-us_business/