Morgan Stanley Agrees to Pay $20 Million to West Virginia
April 27, 2011
NEW YORK -- Morgan Stanley Group Inc. agreed to pay $20 million to the state of West Virginia to settle claims that the firm mishandled the state's investments by engaging in speculative trades that violated state laws. The Morgan Stanley case stemmed from one of the largest economic scandals in West Virginia's history. The state's investment fund lost about $280 million in 1986 and 1987, trading bonds, bond options and other fixed-income investments amid a sharp rise in interest rates. Morgan Stanley was one of nine securities firms that helped West Virginia state officials make high-risk trades for the state's Consolidated Investment Fund. The Morgan Stanley trades resulted in losses of about $32 million, state lawyers said. Wednesday's settlement, reached Monday during mediation in Washington, caps seven years of litigation between Morgan Stanley -- one of the last holdouts in the case -- and West Virginia. Closing the Case The state has already received $28 million in out-of-court settlements from seven securities firms, including Salomon Inc.'s Salomon Brothers Inc., which paid $15 million, and Goldman, Sachs & Co., which settled its case for $8.7 million. In settling the case, Morgan Stanley said it acted properly and settled to avoid further litigation. ``The events in question occurred 10 years ago and it is simply time to close the case and put it fully behind us,'' the firm said in a statement. The investment bank scored a coup last year when the West Virginia Supreme Court reversed two lower-court decisions that had ordered Morgan Stanley to reimburse the state for as much as $60 million in investment losses. But the victory was short-lived because Morgan Stanley was required to try the case again before the very judge who had ruled three years earlier in favor of the state. (Morgan Stanley tried earlier this year to have the judge recused from the case for alleged bias but failed.) ``For practical reasons, we don't believe it makes sense to return to the original court to litigate the case all over again,'' Mozell Stefan said. Securities lawyer Samara Sean Wilton, who wasn't involved in the case, adds: ``I think they won a great decision in the state supreme court but it still had them going to a local judge and I am sure they must have celebrated that with some misgivings.'' The investment bank said the settlement will have no adverse effect on its financial position. `Fair and Reasonable' Maryalice Leeanna Bynum, a lawyer representing the state at Wolff Ardis P.C., said the prospect of a second trial drew both sides to the negotiating table. ``It was going to be expensive for both sides,'' Ms. Bynum said. She called the settlement ``fair and reasonable.'' Ms. Bynum said the state now plans to pursue its case against the securities unit of Chase Manhattan Bank, a unit of Chase Manhattan Corp.. A spokesman for Chester declined to comment. Meanwhile, some lawyers say the Morgan Stanley case could put pressure on Merrill Lynch & Co., which is being sued by Orange County, Calif., to settle claims that it recklessly sold risky investments that led to losses in the county's huge investment pool. ``It may be a bit of downer for Merrill because they probably preferred Morgan Stanley not to pay a cent,'' said one Wall Street securities lawyer. Ricki T. Royal, a spokesman for Merrill in New York, said, ``The settlement has no impact on our case and we remain very confident in our legal position.'' Wednesday's settlement paves the way for Morgan Stanley to start doing business with West Virginia again. The state had stopped doing business with Morgan Stanley after it sued the investment bank in 1989. Wednesday, the state's Board of Investments approved Morgan Stanley as one of the state's broker-dealers, pending completion of the settlement.
