March 20 Morgan Stanley has settled a lawsuit in which it accused a commodities hedge fund run by Peak Ridge Capital Group of failing to cover more than $40 million of losses stemming from bad bets on natural gas.
Terms were not disclosed in a dismissal order filed with the U.S. District Court in Manhattan. A lawyer for Morgan Stanley confirmed that the lawsuit has been settled.
In its November 2010 lawsuit, Morgan Stanley contended that it lost money after Peak Ridge had failed to maintain proper margin requirements, amounting to a breach of contract.
Peak later counterclaimed, arguing that Morgan Stanley breached the contract by shutting down its account and liquidating its contents, enriching itself in the process.
Eric Levine, a lawyer for Peak, did not immediately respond to a request for comment. Peak could not immediately be reached.
Peak Ridge had held an account with Morgan Stanley from October 2009 to June 2010. During that time, the bank tripled the firm's margin requirements, to protect against the added risks that it perceived that Peak Ridge was taking.
Natural gas prices soared in early June 2010, catching many traders by surprise, and according to Morgan Stanley causing a $9.8 million loss in Peak's account on June 4.
A week later, the bank began shutting down the account, claiming that Peak was in default by missing a newly increased margin requirement. Morgan Stanley said it sold the contents to an affiliate in an "arms-length" transaction.
The importance of assuring the financial wherewithal of traders in natural gas grew following the 2006 collapse of the multibillion dollar Amaranth fund.
Brian Hunter, a Canadian trader once associated with Amaranth, was a Peak Ridge consultant who helped the firm devise trading models and strategies after it had bought the assets of his Solengo hedge fund firm in 2007. Hedgefund.net said he had stopped working with Peak Ridge during 2008.
In March 2013, U.S. District Judge Andrew Carter dismissed much of Park Ridge's countersuit, but said it could pursue a claim with regard to the liquidation of its account by a Morgan Stanley trader who was simultaneously trading for his own book. Peak Ridge argued that this created a conflict of interest.
The case is Morgan Stanley & Co v. Peak Ridge Mater SPC Ltd, U.S. District Court, Southern District of New York, No. 10-08405. (Reporting by Jonathan Stempel in New York; Additional reporting by Barani Krishnan; Editing by Lisa Shumaker)