Fears of a growing investigation of Wall Street banks sent Morgan Stanley's stock falling Wednesday even as the company said it knew nothing about a reported inquiry into its mortgage securities trading.
The Wall Street Journal reported that federal prosecutors are investigating whether Morgan Stanley misled investors about its role in a pair of $200 million derivatives whose performance was tied to mortgage-backed securities. The newspaper said Morgan Stanley sometimes bet against the success of the derivatives, which were underwritten and marketed to investors by Citigroup Inc. and UBS AG.
Morgan Stanley stock fell 58 cents, or 2.04 percent, to $27.80.
A Morgan Stanley spokesman said the bank has not been contacted by the Justice Department about the deals in question and has no knowledge of an ongoing investigation.
The spokesman said the bank has not received a Wells Notice from the Securities and Exchange Commission. A Wells Notice informs a company that the SEC's staff is recommending bringing charges against the company.
Speaking in Tokyo on Wednesday, Morgan Stanley CEO James Gorman said, "We have no reason to believe there is any substance behind any supposed investigation."
Janice Oh, spokeswoman for the U.S. Attorney's Office in Manhattan, would not confirm or deny an investigation Wednesday.
The reported investigation comes as the Securities and Exchange Commission is charging Morgan Stanley competitor Goldman Sachs Group Inc. with fraud over that bank's packaging of mortgage securities. Goldman Sachs is reported to be facing a separate criminal investigation into whether it misled investors about those securities. Goldman has denied the charges and plans to defend itself against the charges.
Federal regulators have been increasing their reviews of whether Wall Street banks misled investors when selling derivatives and other risky securities that have been largely blamed for the credit crisis.
Many of the securities were tied to the performance of subprime mortgages. As mortgages increasingly defaulted during the recession, the value of many of the securities collapsed costing investors and the banks billions of dollars.
John Coffee, securities law professor at Columbia Law School, said proving wrongdoing by Morgan Stanley will be "significantly harder and more challenging" than the case against Goldman Sachs. He noted that Morgan Stanley didn't underwrite or market the mortgage deals reportedly being investigated, making it harder to prove that the bank misled investors.
A Citigroup spokesman declined to comment on the deals in question. The bank has previously said it is cooperating with the SEC's industrywide investigation into risky subprime mortgage deals that contributed to the financial crisis.
A UBS spokesman declined to comment.
Morgan Stanley itself lost billions of dollars during the recession and credit crisis on its investments in the mortgage-related securities, including deals tied to commercial real estate loans.
The investigations into Morgan Stanley and Goldman Sachs also come as Congress discusses a major overhaul of financial regulations that could end up restricting trading at Wall Street banks.
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