Morgan Stanley Probed by Federal Authorities Over Mortgage-Derivatives Deals

Goldman Sachs (GS) and JPMorgan (JPM) won’t be the only companies whose trades and sales of securities are being investigated. Regulators have now set their sights on Morgan Stanley (MS) too.

According to a WSJ report, the bank is being investigated by U.S. federal authorities on whether or not it misled investors about mortgage derivatives deals it helped create and sometimes bet against.

The Journal said that the probe is at a preliminary stage and focused on a pair of collateralized debt obligations [CDO] that were named after U.S. Presidents James Buchanan and Andrew Jackson. Traders called them the ‘Dead Presidents’ deals.” The Journal notes however, that while Morgan Stanley helped design the deals and bet against them, didn’t market them to clients, leaving that to UBS AG (UBS ) and Citigroup (C). The CDO transactions allegedly occurred in 2006.

Morgan Stanley Chief Executive James Gorman told media in Tokyo he was not aware of any federal investigation into his firm.

“We have not been contacted by the Justice Department about any transactions that were raised in The Journal article,” Gorman said at a news conference on Wednesday. “We have no knowledge whatsoever about the Justice Department investigation.” He added that the firm has “looked into the situation internally in some detail.”

Morgan Stanley made money on the CDO transactions, but any profit was dwarfed by the $9 billion the firm lost on bullish mortgage bets in fiscal 2007, the paper said.

The revelation of the possible Morgan probe comes less than a month after its rival Goldman Sachs (GS) was charged (April 16) with fraud by the SEC over its marketing of ABACUS.

Morgan Stanley’s shares took a hit ahead of Wednesday’s opening bell, falling more than 5% to $26.86.

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