Morgan Stanley Sued By Russian Tycoon For Short-Selling Fraud

Morgan Stanley Sued By Russian Tycoon For Short-Selling Fraud

In a federal trial that began Monday in Manhattan, megabank Morgan Stanley is charged with using inside information about Russian magnate Oleg Deripaska’s $1.5 billion investment in an auto-parts maker to unethically profit from its own short selling activities.

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Deripaska is the owner of United Co. Rusal Plc, the largest global aluminum producer. He sued Morgan Stanley and BNP Paribas SA, claiming they intentionally forced the sale of his Magna International sales during the financial crisis which cost him more than $900 million.

Of note, BNP Paribas loaned Deripaska most of the money for the auto parts firm  investment, with his Magna shares used as collateral. BNP, however, has been dismissed as a defendant, but the suit against Morgan Stanley is proceeding.

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More on Deripaska suit against Morgan Stanley

Morgan Stanley has claimed that its sale of Deripaska’s Magna shares was completely legal and correct, and that the multiple short positions the megabank took out against Magna using its own cash were merely “standard” risk-management steps.

“Morgan Stanley was completely within its contractual rights, completely within industry standards,” Jonathan Polkes, an attorney for Morgan Stanley said at the trial.

He went on to say that Deripaska is solely responsible for the disagreement here because he “walked away” from his Magna investment when he refused to pay when the banks sent him a margin call based on the decline in stock value.

At the trial, the jury saw an excerpt from a videotaped deposition of Deripaska where he commented that his loss (the net difference in how much he borrowed for the deal and how much was recovered from the liquidation of the Magna shares) “wasn’t the end of the world.”

The lawsuit was filed by Dutch-based Veleron BV, controlled by Deripaska, and is requesting damages of $15 million to $25 million.

“This case is about Morgan Stanley choosing profit over honoring its obligations,” Aaron Marks, an attorney for Veleron, commented in his opening statement at the trial.

Veleron alleges Morgan Stanley was “perversely incentivized” to sell Deripaska’s collateral because the bank was dealing with a liquidity crisis at the time and would receive a huge fee for selling his Magna shares.

The lawsuit also accuses the bank of failing to get the best price for the 20 million shares of Magna it sold.

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