MercoPress. South Atlantic News Agency

Morgan Stanley Denies Having Misled Investors about Mortgage Derivatives

CEO James Gorman

Morgan Stanley (NYSE:MS) CEO James Gorman denied allegations the US bank misled investors about mortgage derivatives it sold them. The firm is being probed by US prosecutors over whether the bank misled clients when it sold them collateralized debt obligations as its own traders bet that the value of the securities would drop, the Wall Street Journal reported Wednesday.

However, the New York-based Morgan Stanley (NYSE:MS) hasn’t been contacted by the United States Department of Justice, Gorman told reporters in Tokyo.

Wall Street firms are facing unprecedented scrutiny from lawmakers and prosecutors over whether they miss-sold CDOs linked to the sub-prime mortgages that caused the credit crisis. Goldman Sachs Group Inc. (NYSE:GS) is fighting a lawsuit from the U.S. Securities and Exchange Commission (SEC), which alleges the firm misled investors about a mortgage-linked security in 2007.

“We should expect to see a whole slew of cases appear through the rest of the year,” said Ralph Silva, an analyst at London-based Silva Research Network, which specializes in financial services firms. “Because they are near-impossible to prove, I suspect most are going to be settled on the threat of a perp walk.”

Morgan Stanley arranged and sold CDOs backed by home loans, even as its trading desk would sometimes bet that their value would fall, the Wall Street Journal said, citing traders. The investigation is reviewing whether Morgan Stanley clearly represented its roles, according to the report.

“We have no reason to believe there is any substance behind any supposed investigation that appeared in the Wall Street Journal article,” Gorman said at the press conference, convened to discuss the firm’s Japanese securities and investment banking ventures with Mitsubishi UFJ Financial Group Inc. (NYSE:MTU).

Government officials in the US are seeking to assuage public anger over bank bailouts by tightening regulations after the worst financial crisis since the Great Depression. The changes are intended to prevent a repeat of the crisis that led to 1.78 trillion US dollars in write-downs and losses by financial firms.

The probe stemmed from an ongoing civil-fraud investigation of more than a dozen Wall Street firms’ mortgage bond businesses by the SEC that began in 2009, the newspaper said. The Manhattan US Attorney’s office is conducting a criminal probe into some of those firms’ activities, it said.