NEW YORK (Reuters) - Federal investigators are probing whether Morgan Stanley misled investors about mortgage derivative products it helped create and sometimes bet against, The Wall Street Journal said, citing people familiar with the matter.
Morgan Stanley Chief Executive James Gorman told media in Tokyo that the firm had no knowledge of any federal investigation.
“We have not been contacted by the Justice Department about any transactions that were raised in The Wall Street Journal article,” Gorman said at a joint news conference with Mitsubishi UFJ Financial Group.
“We have no knowledge whatsoever about the Justice Department investigation.”
The report comes less than a month after Morgan Stanley rival Goldman Sachs was charged with fraud by the U.S. Securities and Exchange Commission over its marketing of a subprime mortgage product known as ABACUS.
The SEC is also investigating Deutsche Bank and Citigroup Inc, Fox Business Network’s Charlie Gasparino reported, citing sources. The report said the investigations are ongoing, but that the banks have not received so-called Wells Notices, which signal the SEC’s intent to bring to bring civil charges.
Deutsche Bank spokesman Ted Meyer and Citigroup spokesman Alex Samuelson declined to comment.
Citi shares closed up .24 percent and Morgan Stanley shares ended down 2 percent. Deutsche Bank rose 1.21 percent and Goldman climbed 3.68 percent.
The KBW banks index closed up 1.47 percent on Wednesday.
The Wall Street Journal report, citing traders, said Morgan Stanley arranged and marketed to investors pools of bond-related investments called collateralized debt obligations (CDOs), and its trading desk at times placed bets that the value of the CDOs would fall.
Federal investigators are examining whether Morgan Stanley made proper representations about its roles in the mortgage derivative deals, the newspaper said.
Two particular deals -- named after U.S. Presidents James Buchanan and Andrew Jackson -- were scrutinized by the investigators, the paper said, citing a person familiar with the matter.
Morgan Stanley helped design the deals and bet against them, but did not market them to clients, according to the paper.
Traders called them the “Dead Presidents” deals, the Journal said. The firm made money on those deals, but any profit was far overshadowed by the $9 billion the firm lost on bullish mortgage bets in 2007, the paper said.
“Yes, we have looked into the situation internally,” Gorman said when asked in Tokyo about the “Dead Presidents” deals.
“We have no reason to believe there is any substance behind any supposed investigation that appeared in The Wall Street Journal article this morning.”
The U.S. Department of Justice declined to comment. The SEC could not immediately be reached for comment.
Reporting by Sakthi Prasad in Bangalore and Junko Fujita in Tokyo; additional reporting by Elinor Comlay, Steve Eder and Dan Wilchins in New York and Jeremy Pelofsky in Washington, Editing by Ian Geoghegan, Muralikumar Anantharaman and Bernard Orr
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