Morgan Stanley ‘Dead Presi-dents’ deals investigated

U.S.
prosecutors are investigating whether Morgan Stanley misled investors about
mortgage-derivatives deals it helped design and sometimes bet against, people
familiar with the matter said, in a step that intensifies Washington’s scrutiny
of Wall Street in the wake of the financial crisis.

Morgan
Stanley arranged and marketed to investor’s pools of bond-related investments
called collateralized-debt obligations, or CDOs, and its trading desk at times
placed bets that their value would fall, traders said. Investigators are examining,
among other things, whether Morgan Stanley made proper representations about
its roles.

Among
the deals that have been scrutinized are two named after U.S. Presidents James
Buchanan and Andrew Jackson, a person familiar with the matter said. Morgan
Stanley helped design the deals and bet against them but didn’t market them to
clients. Traders called them the “Dead Presidents” deals.

The
probe is at a preliminary stage. Bringing criminal cases involving complex Wall
Street deals is a huge challenge for prosecutors. The government must prove
beyond a reasonable doubt that a firm or its employees knowingly misled
investors, a high bar. The government launches many criminal investigations
that end without any charges being filed.

The
investigation grew out of an ongoing civil-fraud investigation launched by the
Securities and Exchange Commission in 2009, examining the mortgage-bond
business of more than a dozen Wall Street firms, the people said. The Manhattan
U.S. Attorney’s office now is investigating some of those firms’ activities in
a criminal probe.

“We’ve
not been contacted by the Justice Department about any transactions that were
raised in The Wall Street Journal article and we have no knowledge whatsoever
of a Justice Department investigation,” Morgan Stanley Chief Executive
James Gorman said during a news conference in Tokyo on Wednesday.

Mr.
Gorman said Morgan Stanley has looked into the “Dead Presidents”
deals itself and has “no reason to believe that there is any substance
behind any supposed investigation.”

Spokespeople
for the Manhattan U.S. Attorney’s office and the SEC declined to comment.

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