Feds Reportedly Probe Morgan Stanley Over Mortgage-Derivatives Deals

Morgan Stanley headquarters
Morgan Stanley headquarters

Goldman Sachs (GS) won't be the only company whose trades and sales of securities are being probed -- add Morgan Stanley (MS) to the list. According toThe Wall Street Journal, "Federal prosecutors are investigating whether Morgan Stanley misled investors about mortgage-derivatives deals it helped design and sometimes bet against."

The paper adds, "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 says. 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 CDO transactions allegedly occurred in 2006.

Spreading Probe?

News of a reported probe came as a surprise to Morgan CEO James Gorman, who told the press during an overseas trip to Toyko that he had no knowledge of such an investigation and the firm had not been contacted by the Justice Dept.

Goldman Sachs so far has carried the burden of being the only Wall Street firm to be scrutinized by the government over the investment vehicles. A Morgan Stanley investigation would indicate that deals like those made by Goldman, which included Paulson & Co.'s role in a transaction called "Abacus", aren't isolated. Some prominent figures including Warren Buffett and GE (GE) CEO Jeff Immelt have defended similar trading activities that went on at the most powerful Wall Street firms.

The issue now is whether the probes about mortgage-backed securities trades will be confined to Goldman and Morgan Stanley. If the investigation has any resemblance to the "auction rate" securities probe conducted almost two years ago, then a practice that was nearly universal on Wall Street will mean investigations into several firms.

Growing Out of SEC Probe

"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," according to unnamed sources familiar with the matter, reports the Journal. "The Manhattan U.S. Attorney's office now is investigating some of those firms' activities in a criminal probe."

The government hasn't always been successful in broad investigations into charges for practices that it claims broke federal laws. Its 2006 investigation into options backdating at a number of companies, including Apple (AAPL), was a partial failure because most of the companies charged either successfully defended themselves or the allegations were dropped.