Bloomberg News

Morgan Stanley Wins Dismissal of Pension Fund’s CDO Suit

September 30, 2011

(Updates with claims in lawsuit in third paragraph.)

Sept. 30 (Bloomberg) -- Morgan Stanley won dismissal of a retirement fund’s lawsuit over a collateralized debt obligation called the Libertas CDO.

The Employees’ Retirement System of the Government of the Virgin Islands claimed in the 2009 suit that New York-based Morgan Stanley defrauded investors by collaborating with ratings companies to give the CDO an undeserved AAA rating at the same time it was short-selling almost all of the assets underlying the notes. The CDO was backed by $1.2 billion in assets, according to the complaint.

U.S. District Judge Barbara Jones in Manhattan today dismissed the investor complaint, which asserted claims for fraud and unjust enrichment under New York state law.

AAA is the highest rating for fixed-income instruments. The portfolio was 92 percent residential mortgage-backed securities and included exposure to more than $130 million in loans from Option One Mortgage Corp. and $100 million from New Century Mortgage Corp., both lenders to homebuyers with poor credit scores, according to the complaint.

The Libertas CDO entered into credit-default swaps that referenced specific residential mortgage-backed securities. According to the complaint, the notes collapsed in value after they were purchased by the Virgin Islands retirement fund.

The case is Employees’ Retirement System of the Government of the Virgin Islands v. Morgan Stanley & Co., 09-cv-10532, U.S. District Court, Southern District of New York (Manhattan).

--With assistance from Thom Weidlich in New York. Editors: Stephen Farr, Peter Blumberg

To contact the reporter on this story: Bob Van Voris in court in Manhattan federal court at rvanvoris@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.


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