Morgan Stanley Shares Drop on Reported Probe

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    NEWSLETTERS

    TK
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    Morgan Stanley is in the hot seat now.

    Morgan Stanley shares dropped Wednesday following a report that the investment bank is facing an investigation into mortgage derivative deals.

    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, according to a report in The Wall Street Journal. 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.

    Shares of Morgan Stanley fell $1.13, or 4 percent, to $27.25 in morning trading.

    A spokesman from Morgan Stanley 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."

    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 also facing a separate criminal investigation into whether it misled investors about those securities. Goldman has denied the allegations and plans to defend itself against the charges.

    Federal regulators have been stepping up 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.

    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.