Escolar Documentos
Profissional Documentos
Cultura Documentos
7/2012
oJJSLCIV 6
The JS-44 civil cover sheet and the information contained hereinneitherreplacenorsupplement the filing and servio
initiatingthe civil docket sheet.
pleadings or other papers asrequired bylaw, except asprovided by local rules ofcourt This farm, approved bythe"
Judicial Conference of the United States in September 1974, is required for use of the Clerk of Court for the purposeof
9*0h ?
PLAINTIFFS
DEFENDANTS
CAUSE OF ACTION (CITE THE U.S. CIVIL STATUTE UNDER WHICH YOU ARE FILING AND WRITE ABRIEF STATEMENT OF CAUSE)
(DO NOT CITE JURISDICTIONAL STATUTES UNLESS DIVERSITY)
Has this ora similar case been previously filed in SDNY atany time? No [x] Yes
Dismissed. No
Yes
&Case No.
IS THIS AN INTERNATIONAL ARBITRATION CASE? NO [%| (PLACE AN [xj IN ONE BOX ONLY)
CONTRACT
PERSONAL INJURY
FORFEITURE/PENALTY
BANKRUPTCY
OTHER STATUTES
[ )310 AIRPLANE
[)610 1)620
[ ) 422 APPEAL
28 USC 158
[ ]400
1)410 I )430 [)4S0 1)460 1)470
STATE AN1IIRUST
MILLER ACT
( ]423 WITHDRAWAL
28 USC 157
NEGOTIABLE INSTRUMENT
1)625
DRUG RELATED
SEIZURE OF
PROPERTY
21 USC 881
RECOVERY OF
OVERPAYMENT & ENFORCEMENT OF JUDGMENT MEDICARE ACT
RECOVERY OF
[ ) 330 FEDERAL
EMPLOYERS' LIABILITY
COMMERCE DEPORTATION
RACKETEER INFLU
PROPERTY RIGHTS
1)151 []152
PERSONAL PROPERTY
LIQUOR LAWS
RR & TRUCK AIRLINE REGS OCCUPATIONAL SAFETY/HEALTH
OTHER
[]690
(6XCL VETERANS)
(RICO) [ ] 480 CONSUMER CREDIT []490 CABLE/SATELLITE TV [)810 SELECTIVE SERVICE [ ]850 SECURITIES/
EXCHANGE
I 1153
RECOVERY OF OVERPAYMENT
[]710
FAIR LABOR
()160 1)190
SUITS OTHER
STANDARDS ACT
1)720
PRISONER PETITIONS
I )730
CONTRACT
PRODUCT
LIABILITY
HIA(1395ff) BLACK LUNG (923) DIWC/DIWW (405(g)) SSID TITLE XVI RSI (405(g))
[]875
CUSTOMER
1)195
[ )510
ACTIONS UNDER STATUTES
CIVIL RIGHTS
MOTIONS TO
VACATE SENTENCE
20 USC 2255
REPORTING &
DISCLOSURE ACT
[ ] 196 FRANCHISE
REAL PROPERTY
1)740 (1790
1 )893
Defendant)
LITIGATION
EMPL RET INC SECURITY ACT
(]894 ENERGY
|]895 FREEDOM OF
INFORMATION ACT
1 1210
LAND CONDEMNATION
[)462
[ ]220 [ J230
I ]240 1)245
1)290
EMPLOYMENT
NATURALIZATION APPLICATION
1)463 [)465
[)950 CONSTITUTIONALITY
OF STATE STATUTES
OTHER IMMIGRATION
ACTIONS
TORT PRODUCT
LIABILITY
ALL OTHER
REAL PROPERTY
*^>0 YOU CLAIM THIS CASE IS RELATED TO ACIVIL CASE NOW PENDING IN S.D.N.Y.? A f%
IF SO, STATE:
DEMANDS32-000-000
OTHER
JUDGE Leonard B
Sand
NOTE: Please submit at the time of filing an explanation of why cases are deemed related.
(PLACE AN x IN ONEBOXONLY)
ORIGIN
H 1 Original
Proceeding
Removed from
state court
3 Remanded 4 Reinstated or
from
Reopened
Appellate
Court
BASIS OF JURISDICTION
(U.S. NOT APARTY)
IFDIVERSITY, INDICATE
CITIZENSHIP BELOW.
S4 DIVERSITY
[ ]1
[ ]1
CITIZEN OR SUBJECT OF A
FOREIGN COUNTRY
[]3 []3
M5
[16
|]5
[]6
[ ]2
[ ]2
INCORPORATED or PRINCIPALPLACE
OF BUSINESS IN THIS STATE
[|4M4
Pinnacle Performance Limited -PO Box 1093GT, Queensgate House.South Church Street, George Town, Grand Cayman, Cayman Islands
Morgan Stanley Asia PTE -One Marina Boulevard #28-00, Singapore 018989 Morgan Stanley &Co. International PLC -25 Cabot Square Canary Wharf.London, E14 Q4A
Morgan Stanley &Co. Inc. 1585 Broadway, New York, NY 10036
Morgan Stanley Capital Services Inc. Corporate Trust Center, 1209 Orange Street, Wilmington DE 19801
DffRgSSSS^D2BSS?!LT. AT THIS TIME,. HAVE BEEN UNABLE, WITH REASONABLE DILIGENCE, TO ASCERTAIN THE
RESIDENCE ADDRESSES OF THE FOLLOWING DEFENDANTS:
Check one
(DO NOT check either box if this aPRISONER PETITION/PRISONER CIVIL RIGHTS COMPLAINT.)
D WHITE PLAINS
[X] MANHATTAN
Yr. 1996 )
RECEIPT #
&
Deputy Clerk, DATED.
This case arises out of the same facts and circumstances that gaverise to the filing in this
Leonard B. Sand). Plaintiffs in both cases seek to recover damages incurred by them as a
result of the failure of certain credit linked notes (the "Pinnacle Notes") that Defendants
designed and issued. Plaintiff inthis case has relied in part on the investigation ofthe Ge
Dandong Plaintiffs informulating this Complaint, and the evidence of Defendants'
wrongdoing will substantially overlap in the two cases. Indeed, one ofPlaintiffs claims is for equitable subrogation ofcertain claims asserted by the Ge Dandong Plaintiffs.
Therefore, to avoid unnecessary duplication ofjudicial effort, this case should be
assigned to Judge Sand.
1050980.1
12 CIV 6010
IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
HONG LEONG FINANCE LIMITED
Case No.
(SINGAPORE),
Related Action: Case No. 10-CIV-8086
Plaintiff,
COMPLAINT
-vs.-
o o
-n
cr
-o
_-fc-
Vrn
'<
ro o o
974839.11
TABLE OF CONTENTS
INTRODUCTION WHY HLF HAS FILED THIS LAWSUIT THE INVESTMENT PRODUCTS AT ISSUE IN THIS LITIGATION
I. PARTIES
A. B. Plaintiff Defendants
1 2 3
7
7 8
C.
D.
II.
III.
11
19
20
20
A.
B.
IV.
20
21
27
V.
34
A.
B.
VI.
The Pinnacle Notes Were the Deceptive "Bait" Employed By Morgan Stanley to Secure Control Over Customers' Principal
Morgan Stanley Structured the Synthetic CDOs to Transfer Customers' Investment in the Pinnacle Notes to Morgan Stanley
34
35
55
THE PINNACLE NOTES OFFERING DOCUMENTS WERE MATERIALLY FALSE AND MISLEADING
A.
Representations that the Underlying Assets for the Pinnacle Notes "May Include" Synthetic CDOs Were Materially False and Misleading
55
B.
The Offering Documents Did Not Disclose that the Underlying Assets Were Single-Tranche CDOs That Morgan Stanley Had Created and in which Morgan Stanley Possessed an
Adverse/Opposite Interest 58
C.
The Offering Documents Failed to Disclose that, Given Morgan Stanley's Also Undisclosed Adverse Interests and Counterparty Positions in the Synthetic CDOs it Created, Morgan Stanley Custom-Designed for Use as Underlying Assets Bespoke Built-toFail Synthetic CDOs
60
D.
974839.11
TABLE OF CONTENTS
VII.
64
66
VIII. COUNTS
66 68
70
71
74
75 75
-11-
974839.11
INTRODUCTION
1.
Plaintiff Hong Leong Finance Limited ("HLF" or "Plaintiff) alleges that Morgan
Stanley & Co., Inc. and the other Defendants (collectively "Morgan Stanley" or "Defendants")
created and deceptively sold certain investment products - the "Pinnacle Notes" - that were
designed to fail. Those failures benefited Morgan Stanley, but cost HLF (which distributed the
Pinnacle Notes) tens of millions of dollars.
2.
directed from New York, and executed (in part) in New York. More evidence relevant to this
case will be found in New York than in any other single location.
3.
Allegations concerning HLF's acts are based on personal knowledge. All other
allegations are based on the investigation by Plaintiffs counsel. That investigation included, but
was not limited to, a review and analysis of: (a) the Offering documents for the Pinnacle Notes;
(b) the Offeringdocuments for the Synthetic Collateralized Debt Obligations ("CDOs") that
served as Underlying Assets for each Series of Pinnacle Notes; (c) a report issued by the
Monetary Authority of Singapore with respect to the marketing and sale of "structured notes,"
including some of the PinnacleNotes; (d) the Pinnacle Notes "notifications" concerning matters relating inter alia to the performance, value, and price of the PinnacleNotes and their Synthetic
CDO Underlying Assets; (e) newspaper, magazine, and other periodical articles relating to the
Pinnacle Notes; (f) the Complaint filed in Ge Dandong, et al, v. Pinnacle Performance Limited,
et al, No. lO-cv-8086 (SDNY); and (g) other matters of public record. 4. Many of the facts supporting the allegations contained herein are known only to
the Defendants or are exclusively within their custody and/orcontrol. A reasonable opportunity
for discovery will yield additional, substantial evidentiary support for Plaintiffs allegations.
974839.11
5.
Complaint filed in Ge Dandong, etal, v. Pinnacle Performance Limited, etal, No. 10-cv-8086
(SDNY). See Ex. A (the "Class Complaint").
WHY HLF HAS FILED THIS LAWSUIT
6.
a savings and loan association. HLF is a small, conservative business devoted to serving the financial needs ofits customers ("Customers"): middle-class and working-class Singaporeans (sometimes known as "Heartlanders"), and small- and medium-sized enterprises. Itis regulated
bythe Monetary Authority of Singapore ("MAS"), Singapore's de facto central bank.
7. Morgan Stanley fraudulently convinced HLF to enter into a distribution
8.
Customers.1
9.
When the Pinnacle Notes failed, MAS required HLF to compensate Customers by
establishing a "complaints handling process," even though HLF itself was anunwitting victim of
Morgan Stanley's scheme. Morgan Stanley's fraud has cost HLF more than approximately $32
million (so far).
10.
HLF brings this action to recover the money that it lost as a result of Morgan
Stanley's fraud, including the value ofgoodwill lost because Customers and potential customers
now associate HLF with the failure of the Morgan Stanley Pinnacle Notes.
All values are approximate and are listed in United States Dollars, using the approximate
-2974839.11
11.
The investment products at issue in this litigation are referred to throughout this
13.
The purchaser of a CLN bears what is known as credit risk, or the risk that a
particular group ofentities will not meet obligations on their debt. To compensate him for
accepting this risk, the CLN purchaser receives periodic payments.
14. CLNs are created via a three-step process.
a. Stepl: The Credit Default Swap.
i.
This process begins when aninvestment bank (also known as the "sponsoring bank") creates a new entity, known as a Special Purpose Vehicle ("SPV") (also known as the "issuing trust"). The SPV exists only to facilitate the issuance ofthe CLNs; it generally has no employees, subsidiaries, or day-to-day management.
After creating the SPV, the investment bank enters into a contract
ii.
iii.
Under the contract, the SPV agrees to protect the bank from the
risk that a certain group of entities, referredto as "disclosed
reference entities," will not meet the obligations ontheir debt (i.e., "credit risk"). Inreturn, the bank provides regular payments to the SPV, known as "credit protection payments." Essentially, these
are fixed payments in exchange for taking on credit risk.
iv.
The riskier the disclosed reference entities, the higher the credit
protectionpayments. For example, given the current financial turmoil in Greece, the creditprotection payments involved if the
v.
Theend result of this step is that the SPV generates a stream of "money in" (the credit protection payments from the bank), while
-3974839.11
vi.
Putanother way, the SPV agrees to pay the value of the debt if the disclosed reference entities default ontheir debt. This process is known as a credit default swap, because the counterparties swap
responsibility for a credit default.
b.
i.
The SPV (again: anentity 100% controlled bythe investment bank) begins this step of the process in the position of having
agreed to pay to the investment bank the value of the disclosed
reference entities' debt if they default, but the SPV has no assets with which to make such a payment.
ii. To remedy this shortfall, the SPV issues CLNs to investors. The
iii.
c.
i.
During the term of the CLNs, the investors' principal is invested by the SPV in what are known as "underlying assets."
ii.
iii.
Inthe event of a disclosed reference entity default, the SPV must liquidate the underlying assets to satisfy its obligation to the investment bank under theterms of the credit default swap. Accordingly, in the normal case, it is in the interest ofboth the CLN investors and the investment bank that the underlying assets be both safe and liquid. If the underlying assets are risky or illiquid, the investment bank is not assured of full payment should
the disclosed reference entities default.
iv.
_4_
974839.11
15.
higher than the yields of other "fixed-income" securities (i.e., securities that pay a certain fixed
payment periodically). This is because an investor receives both credit protection payments
(income received for assuming the risk ofdefault) and income from the underlying assets (e.g.,
the yield on U.S. Treasury securities).
16.
CLNs are not without risk, of course. As explained above, if the disclosed
reference entities default, the CLN's underlying assets (purchased with the investors' principal)
are liquidated to cover the default.
17.
Importantly, however, the usual risk inherent in CLNs is that a disclosed reference
18.
The Pinnacle Notes at issue in this case were presentedas especially safe CLNs,
because the disclosed reference entities were highly-rated sovereign nations andmajor
corporations: entities withan infinitesimal riskof default. Morgan Stanley went to extreme
lengths to analyze and promote and prominently advertise these entities. Indeed, this is why
HLF and Customers were drawn to the Pinnacle Notes.
19.
But, unbeknownst to HLF, the Pinnacle Notes were not normal CLNs. Morgan
Stanley secretly, deceptively, andwrongfully invested the investors' principal in very risky
underlying assets.
20.
causeits SPV to select risky underlying assets, because if those underlying assets were to fail,
the investment bank would losethe credit protection provided by the SPV. But Morgan Stanley
was not concerned about potential disclosed reference entity default in connection with the
974839.11
Pinnacle Notes, because Morgan Stanley itself had chosen especially safe, disclosed reference
entities.
21.
The underlying assets were a different story. Unlike the underlying assets in most
CLNs, the Pinnacle Notes' underlying assets were structured to profit Morgan Stanley - at the
expense ofinvestors - when theyfailed.
a.
b.
credit default swaps bundled together. In other words, a CDO, like a CLN, is a type of financial instrument that pays a fixed stream of money to investors in exchange for accepting the riskthat
certain entities (reference entities involved in the creditdefault swaps) will defaulton their debt
obligations.
c.
The CDOs that formed the basis of the Pinnacle Notes' underlying assets
were specifically designed by Morgan Stanley to transfer the investors' principal to Morgan
Stanley if the reference entities (whichwere undisclosed) underlying the CDOs failed to meet
their credit obligations.
d.
because they were composed both of extremely risky undisclosed reference entities and because
the failure of only a small number of undisclosed reference entities would lead to the CDOs'
failure.
22.
The identities of the reference entities contained within each CDO were not
disclosed to HLF before the Pinnacle Notes were issued. Nordid Morgan Stanley reveal thatit
stood to profit, at the expense of Customers, if the Pinnacle Notes failed.
974839.11
23.
HLF never would have sold the Pinnacle Notes to Customers if it had been aware
of the Notes' true nature, and no rational investor would have purchased them.
24. In sunt, HLF and investors in the Pinnacle Notes reasonably believed the
Pinnacle Notes were very safe investments because the disclosed reference entities were
extremely safe. In reality, however, Morgan Stanley (through its various alter egos) placed the investor's principal in Morgan Stanley-created CDOs that were designed to transfer the investors' money to Morgan Stanley. The CDOs operated as designed, and Morgan Stanley
profited at the investors' and HLF's expense.
I. PARTIES A. Plaintiff
25.
and existing under the laws of Singapore. It is headquartered at 16 Raffles Quay, #01-05 Hong
Leong Building, Singapore 048581.
26.
Last year's "Singapore Finance Company of the Year," HLF is a relatively small
institution that takes deposits, makes mortgage and automobile loans to consumers, and offers
financing for small- and medium-sized businesses.
27.
(e.g., Chase, Citibank, etc.) that offer a wide array of investment products and services) and
"finance companies" (smaller entities that are permitted to offer only a discrete range of financial services and products). The closest equivalent in the United States is a savings and loan
association.
28.
today there are only three, including HLF. As a finance company, HLF does business in only a
974839.11
single city-state, and it has no expertise in foreign markets. The majority of HLF's branches are
suburban retail outlets.
29.
HLF is also much smaller than a bank. The three local banks in Singapore each
working-class Singaporeans, it has essentially no experience in the structuring of investment products. It was therefore the perfect target for Morgan Stanley, as explained below.
B. Defendants
1.
31.
corporation duly organized andexisting under the laws of the Cayman Islands (registration number MC-158263), withregistered offices located at PO Box 1093GT, Queensgate House,
South Church Street, George Town, Grand Cayman, Cayman Islands.
32.
While PPL was described as the "Issuer" of the Pinnacle Notes, PPL was created,
operated, and controlled by Defendant Morgan Stanley & Co., Inc. ("Morgan Stanley").
33. PPL is what is known as a "special purposevehicle" ("SPV"). It has never had
34.
Defendant Morgan Stanley Asia (Singapore) Pte, f/k/a/ Morgan Stanley Dean
offices located at One Marina Boulevard #28-00, Singapore 018989, and with a principal place
of business located at 23 Church Street, #16-01 Capital Square, Singapore 049481.
974839.11
35.
Singapore'srole in this litigation, however, was generally a tertiary one. See Ex. C
[Pinnacle Notes]." Ex. B ("Base Prospectus") at 44. b. The majority of MS Singapore's limited duties are "on behalf of PPL.
c.
36.
International Limited ("MS International"), a wholly owned subsidiary of Morgan Stanley, is a corporation duly organized and existing underthe laws of England and Wales, with registered
offices located at 25 Cabot Square, Canary Wharf, London, E14 Q4A.
37.
the investments to serve as the Underlying Assets for the Pinnacle Notes, and was further
charged with the role of monitoring suchassets and taking further action (such as declaring early
redemption) should such assets threatento suffer impairment or loss. See Ex. B ("Base
Prospectus") at 12.
39.
Stanley.
-9974839.11
40.
money from Customers into "rigged" underlying assets thathad been created by Morgan Stanley.
41. At all relevant times, Defendant MS International functioned as a mere
department or alter-ego of Morgan Stanley. Morgan Stanley exercised complete domination and
control over MS International.
4.
42.
offices at Corporate Trust Center, 1209 Orange Street, Wilmington DE 19801, and its principal
executive offices located at 1585 Broadway, New York, NY 10036 (identical to those of Morgan
Stanley).
43.
44.
Counterparty" with respect to the "Swap Agreement" underlying the Pinnacle Notes. This means, among other things, that it was MS Capital that provided the actual credit protection
payments to PPL.
45.
46.
-10974839.11
5.
47.
located at 1585 Broadway, New York, NY 10036. Morgan Stanley is a global financial services
firm that, "through its subsidiaries and affiliates," "provides its products and services to a large
and diversified group of clients and customers, including corporations, governments, financial
institutions and individuals." Ex. B ("Base Prospectus") at 45.
48.
"Swap Guarantor" and "Forward Guarantor" with respect to the Pinnacle Notes. As "Swap
Guarantor," Morgan Stanley undertook to"unconditionally guarantee" MS Capital's periodic
credit protection payments to PPL. See Ex. B. ("Base Prospectus") at 18.
49.
Morgan Stanley created each of the CDOs comprised in the underlying assets for
C.
50.
Morgan Stanley "is a global financial services firm that, through its subsidiaries
and affiliates, provides itsproducts and services to a large and diversified group of clients Morgan Stanley 2009 Form 10-K at 1(emphasis added); see also June 15, 2010 Registration
Document of Morgan Stanley and Morgan Stanley & Co. International pic, filed with the
"
Financial Services Authority ("FSA") at 23-24 (the "June 15, 2010 Registration Document").
51. In particular, "Morgan Stanley provides financial advisory and capital-raising
services to a diverse group of corporate and other institutional clients globally, primarily through
wholly owned subsidiaries that include Morgan Stanley & Co. Incorporated ("MS&Co."),
Morgan Stanley &Co. Internationalpic, Morgan Stanley Japan Securities Co., Ltd. and Morgan
Stanley Asia Limited " Morgan Stanley 2009 Form 10-K at 2 (emphasis added).
-11974839.11
52.
Morgan Stanley "conducts its business from itsheadquarters in and around New
York City, its regional offices and branches throughout the U. S. and its principal offices in London, Tokyo, Hong Kong and other world financial centers." Morgan Stanley 2009 Form 10Kat2.
1-
53.
As explained above, PPL has never had any employees, subsidiaries, or day-to
day management.
54.
PPL at all times has been wholly controlled and dominated by Morgan Stanley -
55.
Morgan Stanley, whose keystrategic decisions are made by Morgan Stanley. 56. On information and belief, MS Singapore's activities relating to the Pinnacle
57.
one of the primary companies through which Morgan Stanley conducts itsoperations. See
Morgan Stanley 2009 Form 10-K, at 2, 122; June 15, 2010 Registration Document, at 13-14
("Morgan Stanley is the holding company ofa global financial services group. MSIpic isone of
the principal operating companies inthe Morgan Stanley Group ..." (emphasis added)).
58. MS International is merely the organizational name given to Morgan Stanley's
"principal officeQ in London." 2009 Form 10-K, at 1; June 15, 2010 Registration Document at
23- 24.
-12974839.11
59.
Morgan Stanley and MS International with various securities regulators identifies Morgan
Registration Document, at 44; May 29, 2007 Registration Document, at 19 (emphasis added).
60. MS International's own financial statements stateexactly the same relationship:
uThe Company's ultimate parent undertaking andcontrolling entity is Morgan Stanley ...."
May 29, 2007 Registration Document, at 27.
61.
There are substantial inter-relationships between MSI pic and other Morgan Stanley group companies
Morgan Stanley is the holding company ofa global financial services group. MSIpic is one oftheprincipal operating companies in the Morgan Stanley Group (as defined below). MSI pic itself provides a wide range of financial and securities services. There are substantial inter-relationships between MSIpic and Morgan Stanley as well as othercompanies in the Morgan Stanley Group, includingtheprovision offunding, capital, services and logistical supportto or by MSIpic, as well as common or shared
13974839.11
Stanley or other companies in the Morgan Stanley Group may have an indirect effect onMSI pic. Such inter-relationships should therefore be taken into account inany assessment of MSI pic.
June 15, 2010 Registration Document, at 13-14 (emphasis added, bold in the original); see also June 15, 2010 Registration Document, at 44; May 29, 2007 Registration Document, at 4, 17-19.
62. Among the self-described inter-relationships between Morgan Stanley and MS
International were: (1) Morgan Stanley's "provision offunding, capital, services and logistical
support to []MSI pic"; and (2) "common orshared business oroperational platforms orsystems,
including employees" and (3) common employees. Id.
63.
65.
International: MS International simply appears as "Morgan Stanley inthe United Kingdom." Id.
This lack of differentiation is underscored by MS International's statement that "an
company-specific performance indicators, but only through consideration ofthe Morgan Stanley
Group's overall performance:
-14974839.11
66.
capital injection and debt financing. See June 15, 2010 Registration Document at 14 ("Morgan
Stanley has in the past provided financial support to MSI pic through capital injection and debt
financing"); May 29, 2007 Registration Document, at 15 (same). 67. MS International's Financial Statements detail multipleoccasions where MS
International secured at least hundreds of millions of dollars of funding from other entities
controlled by Morgan Stanley. See May 29, 2007 Registration Document, at 47 and 75.
68.
The Pinnacle Notes are an example of the manner in which Morgan Stanley
was required, as the designated "Forward Counterparty," to perform certain operations and obligations (and to transfer certain funds) in the case of certain events. Morgan Stanley
guaranteed MS International's contingent obligations and funds transfers by designating itselfas
the "Forward Guarantor" and providing a "Forward Guaranty." It appears from the Pinnacle
Notes that Morgan Stanley undertook this obligation gratuitously. This "free," non-arm's-length,
assumption of such contingent obligations further shows that Morgan Stanley and MS
International were not independent entities.
69. In a subsection of the MS International Financial Statements titled "Directors
Report" and subtitled "Principal and Business Review," MS International and its directors
represented that MS International and its directors did not control MS International's
management of credit risk, market risk, credit risk, liquidity and cash flow risk. Risk management was centrally controlled, operated, and applied throughout Morgan Stanley:
Risk management
Risk is an inherent part of the Company's business activity and is managed within the context of the broader Group's business activities. The Group seeks to identify, assess, monitor and manage
-15974839.11
each of the various types of risk involved in its activities, in accordance with defined policies and procedures.
Market risk
Market risk refers to the risk that a change in the level of one or more market prices,rates, indices, implied volatilities (the price volatilityof the underlying instrument imputed from option prices), correlations or other market factors such as liquidity, will result in losses for a position or portfolio.
The Group manages the market risk associated with its trading activities in consideration of each individual legal entity, but on a
-16974839.11
Credit risk
Credit risk refers to the risk of loss arising from borrower or counterparty default when a borrower, counterpartyor obligor is unable to meet its financial obligations. The Group manages credit risk exposure in consideration of each individual legal entity, but on a global basis, by ensuring transparency of material credit risks, ensuring compliance with established limits, approving material extensions of credit, and escalating risk concentrations to appropriate senior management.
Liquidity and cashflow risk
The Group's senior management establishes the overall liquidity and capital policies of the Group. The Group's liquidity and funding risk management policies are designed to mitigate the potential risk that the Group and the Company may be unable to access adequate financing to service its financial obligations when
they come due without material, adverse franchise or business
impact. The key objectives of the liquidity and funding risk management framework are to support the successful execution of
the Group's and the Company's business strategies while ensuring ongoing and sufficient liquidity through the business cycle and
during periods of financial distress.
publicly disclose its financial results separately from Morgan Stanley. Instead, MS International's results were reported as one portion of Morgan Stanley's consolidated financial
results for operations.
71.
At times relevant to the action, there was significant overlap in officers, directors
and personnel between MS International and Morgan Stanley. See id. 18-19. All of the MS
International directors were "employed withinthe Morgan Stanleygroup of companies." See id.
at 19.
72.
-17974839.11
a.
Institutional Securities business. Two of the seven members of the operating committee
overseeing that business were MS International board members. One of those two served as Morgan Stanley's co-head of institutional securities sales and trading.
b.
committee.
c.
i.
One served as chief operating officer for Morgan Stanley's private wealth management operations in Europe and the Middle East; One was tasked by Morgan Stanley (per a press release) "with responsibility for further developing Morgan Stanley's relationships with key clients across Europe and the emerging
markets"; and
ii.
iii. 73.
74.
its purported headquarters and offices are listed at the same address and phone number as
Morgan Stanley's headquarters.
75.
MS Capital does not publicly report its own financial results of operations.
Stanley; it instead merely serves as Morgan Stanley's face/alter-ego for its derivative and swap transactions within the United States. See Moody's Customers Service, Swaps Push-Outto Have
Major Impact on U.S. Dealers, June 21, 2010, at 4, 5, 6.
-18974839.11
77.
performance in such transactions. See Id. at 5. For example, in a prospectus regarding the
issuance of mortgage-backed securities, Morgan Stanley explains:
Morgan Stanley Capital Services Inc. is a Delaware corporation that is a wholly-owned, unregulated, special purpose subsidiary of Morgan Stanley. Morgan Stanley Capital Services Inc. conducts business in the over-the-counter derivatives market, engaging in a variety of derivatives products, including interest rate swaps, currency swaps, credit default swaps and interest rate options with institutional clients. The obligations of Morgan Stanley Capital Services Inc. are 100% guaranteed by Morgan Stanley. See Morgan Stanley Capital, Inc. "free writing prospectus" filed with the SEC on July 13, 2006, at 31 (emphasis added). 78. In keeping with its general practice, Morgan Stanley guaranteed MS Capital's
contractual obligations for both the Pinnacle Notes and the CDOs that Morgan Stanley created to
serve as the underlying assets for the Pinnacle Notes.
79.
of substantial potential liabilities, these guarantees were provided by Morgan Stanley to MS Capital free of charge: they were not arm's length transactions. This "free," non-arm's-length, assumption of obligations further shows that Morgan Stanley and MS Capital were not
independent entities.
D. Summary Overview of Defendants' Relationships to Each Other and to this
Litigation
80.
Morgan Stanley created the underlying assets in such a way that money placed
into the underlying assets would flow to its alter ego, MS Capital. MS International, controlled
by Morgan Stanley, placed the money from Customers who invested in Pinnacle Notes into those
-19974839.11
existed solely to enter into the various contracts necessary for Morgan Stanley to carry out its fraudulent scheme. MS Singapore, under the control of Morgan Stanley, played only a
tangential role in the events described herein.
II. JURISDICTION, VENUE. AND FORUM
81.
1332(a)(2).
The court has subject matter jurisdiction over this matter pursuant to 28 U.S.C.
82.
events or omissions giving rise to the claim occurred in the Southern District of New York.
83. The Southern District of New York is the most convenient forum for this
litigation because, among other things, it is substantially similar to litigation currently pending in
the Southern District. See Ex. A ("Class Complaint"). In particular, it involves identical
defendants, identicalcore facts, and overlapping discovery.
III. OVERVIEW OF CLNs AND SYNTHETIC CDOs
A.
84.
linked to performance of debt that has been issued byentities such as corporations or sovereign
nations (this is the "credit" in the term "credit linked note"). The entities whose "credit" is
"linked" to a CLN are referred to as the "disclosed reference entities."
85.
nations through the use of what is known as a creditdefault swap. This is a transaction that
transfers the risk that the disclosed reference entities will default on their debt from the holders
86.
In return for this risk, the purchasers of a CLN receive a higher yield than they
might otherwise obtain through more traditional fixed income financial instruments. They
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receive both yield from the investment of their principal into the underlying assets, plus credit
protection payments from the counterparty (i.e., the counterparty is paying the holder of a CLN
for bearing the risk that the disclosed reference entities default on their debt).
87.
a.
First, the sponsoring bank establishes an entity through which it will issue
its CLN, known as an issuing trust. These issuing trusts are customarily SPVs: brain-dead
entities controlled by the sponsoring bank whose sole purpose is the issuance of CLNs. The SPV and sponsoring bank then enter into a credit default swap under which the bank transfers to the SPV the risk of certain corporate and/or sovereign bonds failing. The sponsoring bank provides
credit protection payments to the SPV in exchange for this risk. b. Second, the SPV now has to fund its obligations. The SPV does this by
issuing and selling CLNs to investors. c. Third, the issuing trust/SPV, upon receipt of the CLN investors' principal,
customarily invests that principal in a safe and liquid income-generating asset (the "underlying
asset"). This principal secures the SPV's obligations in two distinct senses: i. If the linked credit ("disclosed reference entities") default and suffer losses, the SPV uses the principal raised from CLN investors to make requisite counterparty payments. On the other hand, if no disclosed reference entity defaults and suffers losses, the SPV returns investors' principal upon CLN maturity.
ii.
B.
88.
As indicated above, the underlying assets in which Morgan Stanley invested the
capital raised by the Pinnacle Notes were not safe, liquid assets. Rather, they contained a
particular type of CDO.
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89.
assets that the CDO purchases and holds (a "cash CDO"), or a collection of credit default swaps
that merely "reference" such assets (a "synthetic CDO").
90. The CDOs used by Morgan Stanley, discussed below, are known as custom
91.
A cash CDO is similar to a mutual fund, albeit one that invests in bonds rather
than in stocks. A principal benefit of a cash CDO structure is diversification of risk. a. For example, a $100 million cash CDO could be based on ten bonds of
$10 million each issued by ten different investment grade corporations (e.g., IBM, Coca-Cola,
General Electric, etc.). b. To purchase these assets, the CDO would issue notes to investors and use
the cash proceeds from their purchase to actually buy the underlying bonds (i.e., the notes are
now "backed" by the bonds themselves).
c.
The end result is that the purchasers of the CDO notes gain "exposure" to
the CDO's asset portfolio. In other words, the income generated by the bonds is passed to CDO noteholders and any failure ("impairment") in any of those assets creates an impairment to the
CDO notes, thus resulting in losses to the noteholders.
2. Synthetic CDOs
a.
Synthetic CDOs "Reference" an Asset Portfolio "Synthetically" Through Credit Default Swaps.
92.
credit default swaps, rather than by cash purchase of the actual assets. A bank issuinga synthetic
CDO does not actually buy the reference assets; rather, it effectively permits investors to invest
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in a fictional portfolio ofassets that the bank has not purchased. For example, whereas a $100
million cash CDO canraise $100 million from investors to purchase ten actual bonds of $10
million each, a $100 million synthetic CDO seeking to replicate that portfolio would enter into
credit default swaps that reference the same ten $10 million bonds. The amount any particular
bond is referenced is known as the notional amount.
a.
Synthetic CDOs share many basic features with CLNs, including: (A) An
issuing trust (to issue the CDO), set up by a sponsoring bank, such as Morgan Stanley; (B) credit
default swap contracts between the issuing trust andthe sponsoring bank; (C) the issuance of
CDO notes to investors to fund the CDO's swap obligations to the sponsoring bank; and (D) the reinvestment of the funds raised bythat issuance into safe, liquid underlying assets, to serve as
collateral (the "Investment Collateral") if the reference entities fail.
b. Thus, like CLNs, synthetic CDOs transfer the credit risk associated with
certain reference entities from the sponsoring bank to investors. The principle difference, as detailed below, is that CDOs are structured in a way that allows different types of investors to
bear different amounts of risk.
93.
Synthetic CDOs are very flexible financial instruments. This is because the
issuing trust for a synthetic CDO can enter into credit default swaps referencing any notional
amount (e.g., $10 million, $200 million) of any credits (e.g., an IBM bond, an Apple bond, the
bonds issued by all Eastern European states, the bonds issued byevery company whose name
includes an umlaut, etc.), whether or not any such bonds actually are available for purchase.
b. Because Synthetic CDOs Are Based on Credit Default Swaps, They Feature Counterparties Who Take Opposing Positions.
94.
Because synthetic CDOs are based on credit default swaps, they feature
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a.
"short" on the CDO's risks i.e., it stands to benefit ifthe reference entities underlying the
CDO fail (it stops paying credit protection yet loses no principal). b. Theother counterparty (the CDO issuing trust) is "long" on the risk it
stands to benefit if the reference entities underlying the CDO do not fail (i.e., it is accepting credit protection payments inexchange for bearing the risk that the reference entities will fail).
95. The CDO issuing trust "funds" its potential counterparty obligations by selling
notes to investors. This transfers the "long" riskfrom the CDO issuing trust to investors who
purchase the notes. The principal paid by investors to purchase the CDO notes is invested, but is
at risk of impairment should the reference entities included in the CDO's portfolio default
(because default triggers the CDO issuing trust's obligation to pay its credit default swap
counterparty with the investors' principal).
a.
definition, take the "long" position (stand to benefit if the reference entities do not fail).
b. There is also a counterparty to the creditdefaultswap underlying the CDO
thathas taken a "short" position (stands to benefit if the reference entities do fail).
3. CDO Tranches Determine Risk.
96.
For CDO investors, the most important determinant of risk is generally the
97.
An issuing trust will issue multiple sets ("tranches") of unequal notes representing
senior/subordinate interests in the portfolio of a given CDO. The mostjunior of the tranches
stands first in line for any portfolio losses. Senior tranches are in turn protected from portfolio losses by the sumtotal of the more junior tranches below them. To compensate more junior
tranche investors for the increased risk they bear, the CDO structure also redirects the income
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generated by the CDO portfolio and Investment Collateral so that junior tranches are provisioned
with higher yields and seniortranches with lower yields.
98.
Losses accumulate from the most junior to the most senior tranche. Forexample,
in a $100 million CDO, the most juniortranche could be $5 million. If losses rise to $1 million, the $5 million tranche suffers a $1 million principal impairment (i.e., it has lost20% of its
value), even as more senior tranches remain untouched. If losses rise to $5 million, the $5
million tranche suffers 100%principal impairment, even as more senior tranches remain
untouched. If losses rise above $5 million, however, the next mostjunior tranche begins to
suffer principal impairment.
99.
Each CDO tranche represents a concrete, discrete "slice" of the aggregate risk
residing in the CDO portfolio. In the above example, the $5 million tranche of the $100 million
CDO represents the 0%-5% slice of aggregate risk. If the next mostjunior tranche is $2 million,
thattranche would thus represent the 5%-7% risk slice: it would startexperiencing principal
impairment if lossesrose above$5 million (or 5% of the CDO's total portfolio) and would experience full principal impairment whenaggregate losses reached $7 million(or 7%).
100. The risk embodied in each CDO tranche is defined by three structural factors:
a.
losses at which the tranche in question begins to sufferprincipal impairment (e.g., 5% for the
second-most-junior tranche in the example above). This indicates the proximityof the tranche to
CDO portfolio risk.
b.
losses at which the tranche in question suffers total principal impairment (e.g., 7% for the same
tranche).
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c.
Detachment Point and the Attachment Point (e.g., 7%-5% = 2%). This indicates the speed and
severity of principal impairment. All other things being equal, a thintranche will suffer severe
or total principal impairment more quickly than a thick one.
4. Bespoke Single-Tranche Synthetic CDOs
a.
101.
As implied above, an issuing trust will usually create a CDO with an array of
focus on however senior orjunior a "slice" ofrisk the parties agree upon, and can be ofany
thickness.
b.
Single-Tranche CDOs; A Bet Between Two Parties over a Precisely-Specified, Discrete Slice of Losses Potentially Generated by a Portfolio of Reference Entities
104.
precise reference entitiesto be included in the portfolio, as well as the tranche's location and
thickness.
105.
There are three possible outcomes for any given single-tranche CDO:
a. Aggregate portfolio losses remain below the tranche Attachment Point. In
this situation, the issuing trust owes nothing under the credit default swap to its counterparty.
Upon maturity, the issuing trust liquidates the Investment Collateral and returns 100% of investors' principal.
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b.
Aggregate portfolio losses rise above the tranche Attachment Point, but
belowthe tranche Detachment Point. Here, the issuing trust must makepayments to its
counterparty under the credit default swap. These payments are made by liquidating some of the Investment Collateral, which impairs investors' principal to some degree.
c. Aggregate portfolio losses rise to or exceed the tranche Detachment Point.
In this scenario, the issuing trust liquidates all of the Investment Collateral to makepayments to
its credit default swap counterparty. Accordingly, it has nothing left to return to its investors,
who suffer 100%) principal loss.
106.
Morgan Stanley caused the underlyingassets for the Pinnacle Notes to be single-
1.
107.
Each Series of Credit-Linked Pinnacle Notes was created, issued, and sold
pursuant to certain "Offering Documents": a. The Base Prospectus. Each Series of Pinnacle Notes was created, issued,
and sold pursuant to a shared Base Prospectus dated August 7, 2006. It was amended by Supplementary Base Prospectusesdated April 24, 2007 and August 13, 2007; however, these amendments were not substantive, and merely noted changes in the names of various parties involved in the Pinnacle Notes transactions, including MS Singapore and MS International.
These documents are referred to, collectively, as the "Base Prospectus." See Ex. B.
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b.
issued, and sold pursuant to a Pricing Statement specific to that Series.2 These documents are
referred to, collectively, as the "Pricing Statements." See Ex. D. The Pricing Statements were standardized documents that did not materially differ from each other. In particular, they were
substantively identical in their representations concerning what the Pinnacle Notes were, how the
Pinnacle Notes worked, and the risks to which the Pinnacle Notes were exposed. The only
differences related to the specific dates ofissuance and maturity ofeach Series, the specific
interest rates promised by each Series, and the specific basket of disclosed reference entities to
which each Series was credit-linked.
c.
providea "Summaryof Terms" with respect to each Series of PinnacleNotes. These are referred
to, collectively, as the "Brochures." The Brochures, like the Pricing Statements, were
standardized documents that did not materially differfrom each other. 108. Each Series of Pinnacle Notes wasprominently linked to the creditworthiness of a
basket of five to seven specific disclosed reference entities that, inall cases, were highly-rated
sovereign nations and/or major corporations that were well-known in Singapore. The Offering
Documents prominently displayed these disclosed reference entities and made clear that should
any default orexperience any other defined "Credit Event," Pinnacle Notes investors' principal
would suffer substantial or total impairment. None of the disclosed reference entities ever defaulted or experienced any other defined "Credit Event."
In particular: (1) Pinnacle Notes Series 2 Pricing Statement dated October 6, 2006; (2) Pinnacle Notes Series 3 Pricing Statement dated January 9, 2007; (3) Pinnacle Notes Series 6/7 Pricing Statement dated May 16, 2007; and (4) Pinnacle Notes Series 9/10 Pricing Statement dated October 25, 2007, as amended by a Pinnacle Notes Series 9/10 Supplementary Pricing
Statement dated November 7, 2007.
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109.
Pinnacle Notes from Ge Dandong, etal, v. Pinnacle Performance Limited, etal, No. 10-cv8086 (SDNY). See Ex. A ("Class Compl.") at ffif 129-134.
110.
Between August 2006 andDecember 2007, Morgan Stanley created and issued
eight "Series" of Credit-Linked Pinnacle Notes (1-3, 5-7, 9-10) through its alter ego, PPL. Six of
these were sold through HLF (2-3, 6-7, 9-10).
111.
112.
as CLNs.
The Pinnacle Notes' Offering Documents describe each Series of Pinnacle Notes
113.
Indeed, the Pinnacle Notes appeared on their face to be typical CLNs - i.e., fixed-
income investments whose risk is related almost exclusively to the chance that the disclosed
reference entities might fail. To reiterate the basic structure of the notes:
a. Morgan Stanley set up an issuing trust, PPL. PPL was a "brain-dead"
b.
transaction with MS Capital (also wholly controlled by Morgan Stanley). This transaction
referenced a discrete basket of five to seven highly-rated sovereign nations and/or major
corporations. These were the disclosed reference entities that would form the basis of the credit
risk in the Pinnacle Notes.
i.
PPL (controlled by Morgan Stanley) received regular credit protection payments from counterparty MS Capital (controlledby
Morgan Stanley), in exchange for which it assumed the credit risk presented by the basket of disclosed reference entities.
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ii.
PPL then created and issued the Pinnacle Notes, more than 45% of which it soldthrough HLF. The money collected by PPL for issuing the Pinnacle Notes was Customers' principal.
iii.
The apparent risk of the Pinnacle Notes was exactly of the sort
typical to CLNs: the risk that the linked credits - the disclosed
reference entities - would default.
iv.
114.
The Pinnacle Notes, ontheir face, were not risky. They also were not high-yield
investments - they offered only slightly enhanced yields over other fixed-income products. This
seemed accurately to reflect the return that one might expect from the combination of safe,
liquid, underlying assets and the slight risk that the disclosed reference entities (highly-rated
sovereign nations and secure major corporations) might default. As expected, the disclosed
reference entities never defaulted.
3.
115.
In 2006, Mr. Mao Nan Hua, a Morgan Stanley employee (through MS Singapore)
approached HLF President Ian Macdonald. Mr. Mao explained that Morgan Stanley was talking
to regulators about selling "structured notes" (i.e., the CLNs) in Singapore.
116. Mr. Macdonald explained that he did not think that HLF would be interested
because Customers preferred fixed deposits: they were older and more risk-averse than the
population as a whole.
117.
Mr. Mao responded by explaining thatMorgan Stanley hada product that was
ideal for Customers, the Pinnacle Notes. He explained that these provided a better return for Customers, butwere still quite conservative. Indeed, he explained that theproducts were "AA"
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rated andbased on disclosed reference entities thatwere sovereign nations or extremely secure
multinational corporations.
118.
HLF had no experience withCLNs, but HLF was aware (or, rather, thought it was
aware) that the risk in such products was related to the risk that the disclosed reference entities
mightdefault. In HLF's (correct) judgment, the reference entities were "gold brick," which,
according to Morgan Stanley (and common sense), made the Pinnacle Notes suitable for
Customers.
119.
products like investment grade corporate bonds that Customers could purchase. This also
indicated to HLF that there likely was not a large additional incremental risk.
120.
investment, frequently more than $100,000. The Pinnacle Notes, however, required a minimum
amount of only$3,750. This also led HLF to conclude that it would be a good product for
Customers.
121.
low-risk products based on Morgan Stanley's representations in the Base Prospectus, which had been reinforced by Morgan Stanley's verbal representations through Mr. Mao, Mr. Ng Chee
Keen, and Mr. Mark Han.
4.
122.
and MS Singapore) entered into a contract whereby HLF agreed to distribute the Pinnacle Notes
(the "Distribution Agreement.") See Ex. C.
123.
HLF agreed to use "all reasonable efforts" to convince Customers to purchase the
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124.
HLF also agreed to collect Customers' investments for Morgan Stanley and to
125.
The Distribution Agreement expressly contemplated that HLF would rely on the
contained inthis Agreement, it has not relied on the Issuer, the Arranger and the
Market Agent or anyof their Affiliates in assessing the merits, risks and
suitability ofentering into this Agreement and it has conducted its own suitability
checks andprocedures for entering into this Agreement[.]
Id. at 5.3 (ii).
126.
The Distribution Agreement stated that HLF was Customers' fiduciary. Morgan
Stanley was aware of the obligation that the Distribution Agreement imposed onHLF vis-a-vis
Customers. See id. at \ 6.2.
127.
Base Prospectus. See, e.g., id. at\ 7.5 ("[N]o application ... shall be accepted from a
prospective investor who has not had the opportunity to receive and read the Base Prospectus
and the relevant Pricing Statement ").
128.
Morgan Stanley (through PPL and MS Singapore) to compensate HLF for losses (including legal
expenses incurred) related to the Pinnacle Notes. This provision is further evidence that Morgan
Stanley was aware that HLF could incur losses in connection with its distribution of the Pinnacle
Notes to Customers:
Each of the Issuer and the Arranger hereby separately covenants andundertakes
to the Distributor to keep the Distributor and its directors, officers, employees
and agents (for the purposes of this Clause 14.1, each a "Distributor
Indemnified Party") fully and effectively indemnified from and against all losses,
liabilities, costs, charges and expenses arising directly orindirectly out ofany claim which are brought against any such Distributor Indemnified Party
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(whether or not such claim is successful or compromised or settled but subject as provided below), and any right of action which are exercised, arising in relation to any breach of the representations, warranties or undertakings contained in or made or deemed to be made by itself under this Agreement. In addition, each of the Issuer and the Arranger separately agree to reimburse each such Distributor Indemnified Party for any legal or other expenses (in each case as reasonably and properly incurred and evidenced in writing) incurred by it in connection with investigating or defending any claim referred to in this Clause 14.1 in respect of itself. If any action shall be brought against any Distributor Indemnified Party in respect of which payment under this Clause 14.1 may be sought from the Issuer or the Arranger, the Distributor shall promptly notify the Issuer and the Arranger in writing and shall employ such legal advisers as may be agreed between the Distributor, the Issuer and the Arranger or, failing agreement, as the Arranger may select. Neither the Issuer nor the Arranger shall be liable in respect of any settlement of any such action effected without its
written consent.
Id. at f 14.1.
129.
and has a non-exclusive jurisdiction clause indicating that Singapore is only one of the places where disputes relating to the Distribution Agreement can be litigated. See id. at If 24.
5. Morgan Stanley Continued to Emphasize the "Safe and
Conservative" Nature of the Pinnacle Notes to HLF.
130.
Morgan Stanley (through its alter ego, MS Singapore), Mr. Ng, trained HLF's staff to sell the Pinnacle Notes to Customers. Throughout this training, Mr. Ng at all times held himself out as
Morgan Stanley's agent.
131.
beginning in the fall of 2006, and continued through the summer of 2007. In substantially all
training sessions:
a.
Pinnacle Notes were very safe. He explained, moreover, that the secondary risk, the underlying assets, had a AA rating and that they were comprised of approximately 100 companies spread
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across different industries. When he was asked to provide more detail regarding the structure of the underlying assets, Mr. Ngexplained that he could not do so until after "closing," but stressed
that HLF and Customers did not need to worry because they were rated AA overall.
b. Mr. Ng stated explicitly that the failure of the disclosed reference entities
was the "primary risk" to the Pinnacle Notes, and conveyed that the default rate on the Pinnacle
Notes would be no higher than 0.1%.
c.
Mr. Ng conveyed that HLF should feel particularly comfortable selling the
Pinnacle Notes because they were Morgan Stanley's product and Morgan Stanley was an honest
and reputable company.
132.
At no time did Mr. Ng (or any other individual from Morgan Stanley) reveal that
Morgan Stanley stood to profit if the Pinnacle Notes failed. HLF never would have sold the
Pinnacle Notes had it been aware of this fact.
133.
Mr. Ng also conducted training at various HLF branches for "front-line" HLF
employees. When he conducted this training, he mentioned riskonly briefly, and conveyed that
the PinnacleNotes were like a long-term fixed deposit.
134. A number of HLF's own staff members purchased Pinnacle Notes based on the
strength of Morgan Stanley's representations (through Mr. Ng) that these notes were safe. Those
staffmembers - likethe other investors in the Pinnacle Notes - losttheirmoney when the
Pinnacle Notes failed.
V.
A.
The Pinnacle Notes Were the Deceptive "Bait" Employed By Morgan Stanley
to Secure Control Over Customers' Principal.
135.
purported to be, Customers' principal would have been invested in a safe and liquid underlying
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asset. If the underlying assets had been safe, Customers and HLF would not have lost their
money because the disclosed reference entities did not default.
136.
International) invested Customers' principal into underlying assets that comprised single-tranche CDOs. They were not liquid and they were not conservative; rather, they were specifically
designed to fail.
137.
This was in Morgan Stanley's interest for two reasons: (A) Morgan Stanley stood
on all sides of this transaction, such that the failure of the underlying assets transferred Customers' moneydirectly to Morgan Stanley; and (B) there was virtually no risk to Morgan
Stanley, because the risk of any default on the part of disclosed reference entities was remote:
they were, as HLF understood, "gold brick." 138. The goal and result of Morgan Stanley's Pinnacle Notes scheme was the transfer
of the vast majority of Customers' approximately $72.4 million investment in the Pinnacle Notes
to Morgan Stanley's coffers.
139.
The foreseeable and actual consequence of Morgan Stanley's scheme was that
HLF eventually was compelled to compensate Customers for losses they incurred as a result of
Morgan Stanley's fraud.
B. Morgan Stanley Structured the Synthetic CDOs to Transfer Customers' Investment in the Pinnacle Notes to Morgan Stanley.
140.
The Pinnacle Notes indicated that Morgan Stanley (through alter ego MS
International) was the "Determination Agent." In other words, Morgan Stanley (through MS International) had sole authority to select the underlying assets into which Customers' principal
would be placed.
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141.
tranche synthetic CDOs created by Morgan Stanley. This made Customers "long" on the risk in those CDOs, and Morgan Stanley (through MS Capital) "short." 142. Morgan Stanley duped HLF into selling a product to Customers through which
Customers placed their principal into the control of Morgan Stanley (through MS International),
which used that control to ensure that essentially every dollar lost by Customers would be
transferreddirectly to Morgan Stanley (through MS Capital). 143. Thus, Morgan Stanley wanted Customers to lose their capital. Morgan Stanley
achieved this end through blatant and undisclosed self-dealing: it invested the underlying assets
into single-tranche CDOs that were so fundamentally unsound that their failure, and the transfer of money from Customers, and HLF itself, to Morgan Stanley was very likely. 144. All of the single-tranche CDOs created by Morgan Stanley to serve as the
underlying assets for the Pinnacle Notes sold by HLF have failed completely, transferring the vast majority of the money invested in the Pinnacle Notes to Morgan Stanley.
1. Morgan Stanley Structured the Synthetic CDOs to Fail.
145.
ways.
Morgan Stanley structured the Synthetic CDOs to be built to fail in at least three
a.
undisclosed reference entities that Morgan Stanley knew presented elevated risks of default.
b. Second, Morgan Stanley structured the Synthetic CDOs' single tranches to
have a very low Attachment Point, thus exposing those tranches to principal impairment upon a relatively low level of defaults and losses in the undisclosed reference entity portfolios.
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c.
tranches to be extremely "thin," so thata very small rise in aggregate portfolio defaults and
losses would cause 100%principal impairment.
146.
Morgan Stanley did not disclose either the list of CDO reference entities, or the
Attachment and Detachment Points, prior to HLF's sale of the Pinnacle Notes to Customers.
a. Morgan Stanley Seeded the Portfolios With Concentrated
Risk.
147.
The bespoke Synthetic CDO portfolios created by Morgan Stanley for use in
connection with the Pinnacle Notes were substantially riskier than standardized credit risk
Synthetic CDOs' failure ratherthan in their success (by taking the "short" side of the
transactions). Morgan Stanley seeded eachof its Synthetic CDO's portfolios with undisclosed
reference entities that presented a high likelihood of default.
149.
The undisclosed reference entities MorganStanley chose for use within the CDOs
for the Pinnacle Notes' underlying assets were suspect for two reasons.
a. First, Morgan Stanley included as undisclosed reference entities in each of
its single-tranche CDO portfolios certain Icelandic banks whose elevated risk of default had been
identified in early 2006, well before Morgan Stanley created the CDOs.
b.
highconcentration of undisclosed reference entities susceptible to a housing market downturn; that concentration was far higher than appeared in the standardized credit risk portfolios that
Morgan Stanley typically created and traded.
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i.
This was true eventhough, by no later than mid-2006, Morgan Stanley had adopted a "bearish" stance towards the housing market, and was predicting - and positioning itself to profitfrom a housing bust.
ii.
Morgan Stanley internally had elaborated a theory that alreadyevident housing price declines during 2006 could devastate not
only the real estate front lines - such as home builders and
mortgage lenders - but also numerous other companies and industries exposed to real estate (e.g., home improvement retailers, furniture and appliance makers, construction materials purveyors), including financial companies heavily exposed to real estate (including banks, non-bank lenders, real estate investment trusts, and insurance companies).
i. Morgan Stanley's Consistent, Concentrated Inclusion of
Icelandic Banks at Elevated Risk of Default
150.
Of the six single-trancheCDOs that Morgan Stanley created for use in all of their
Credit-Linked Pinnacle Notes, three contained as undisclosed reference entities all three of
Iceland's largest banks- Glitnir, Kaupthing, and Landsbanski (the "Icelandic Banks")- while
the remaining three contained as undisclosed reference entities two of the three Icelandic Banks.
151.
banks and credit ratingagency research shows that, at the time: (a) all three Icelandic Banks
were included as reference entities in only 4% of U.S. CDOs; (b) two of the three Icelandic
Banks were included in a further 5% of U.S. CDOs; and (c) an overwhelming majority of U.S.
CDOs - 87%) - did not reference any Icelandic Banks at all. See Puneet Sharma, CDOs Unwind
Headwinds, Barclays Capital European Credit Research, October 16, 2008, at p. 3. Therefore, it
is statistically unlikely that the Icelandic Banks were included in the Synthetic CDOs by chance.
Morgan Stanley's inclusion of these risky banks was intentional.
152.
Since at least early 2006, Morgan Stanley was aware that Icelandic Banks posed
an elevated riskof default. Indeed, in February and March 2006, analysts at various credit rating
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agencies and investment banks (including Fitch Ratings, JPMorgan and Merrill Lynch) issued a
series of critical reports identifyingsubstantial credit concerns at the Icelandic Banks. See Ex. A
("Class Complaint") atf 175 n. 5 (collecting sources). The reports identified five factors causing
these institutions to pose heightened risk.
a. b.
First, the Icelandic Banks' loan portfolios were of suspect credit quality. Second, the Icelandic Banks' loans were secured, to a uniquely high
degree, by shares of stock (and, especially, shares of Icelandic companies, whose share prices
had quadrupled between 2004 and 2007). This transformed the credit risks of the loans into
market risks of Icelandic equities; i.e., the Icelandic Banks were de facto hedge funds.
c. Third, the Icelandic Banks engaged in a high degree of lending to related
parties, including to investment companies controlled bythe controlling investors of the Icelandic Banks themselves (who collateralized such loans with their shareholdings of the
Icelandic Banks, so that suchloans were collateralized by their ownshares).
d. Fourth, and in part as a resultof the foregoing, the Icelandic Banks faced a
deposit base in tiny Iceland, they were dependent on wholesale and short-term funding sources.
This left them exposed to severe liquidity risk.
e.
Fifth, given their tremendous asset growthduring the 2000s, should the
Icelandic Banks threaten to fail, they were beyond the ability of Iceland to save: the Icelandic
Banks' assets were nine times greater than Iceland's entire gross domestic product by year-end
2007. This meant that rather than having the luxury of being "too big to fail," they were instead
"too big to rescue."
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153.
All of the Icelandic Banks defaulted in 2008. On April 12, 2010, the Special
Investigation Commission to the Althingi (the Icelandic Parliament) published a lengthy report
on the failure of the Icelandic Banks. See http://sic.althingi.is/ (partially available in English).
The report explained that the above five factors (identified and understood by Morgan Stanley in
2006) led to the downfall of the Icelandic Banks in October 2008.
154.
Synthetic CDO portfolios during 2006 and 2007precisely because oftheir then-known risks.
Indeed, investment bank analyst reports from March 2006concluded that the smartest way to
approach the Icelandic Banks from an investment perspective was to "Buy Protection on the
Icelandic Banks." See Richard Thomas, Icelandic Banks: Not What You Are Thinking, Merrill
Lynch, March 7, 2006, at p. 1. And that is exactly what MorganStanleydid by includingthem
as undisclosed reference entities in the single-tranche CDOs that Morgan Stanley constructed
and then bet against. ii. Morgan Stanley's Consistent, Concentrated, Inclusion of Companies at Elevated Risk of Default in the Event of a Housing Downturn as Reference Entities
155.
reference entities with an unusually-high concentration of companies whose unifying theme was elevated risk of default in the eventof a housing bust. Rather than seeking broad, representative, coverage of the overall economy (as the standardized creditrisk portfolios offered by Morgan Stanley to sophisticated investors did), Morgan Stanley hand-picked its portfolios in the singletranche CDOs to include a lopsided concentrationof companies exposed to elevated risk of
default in a housing bust.
a.
-40974839.11
including lumber, cement, etc., manufacturers of home appliances, andhome improvement retailers); (3) real estate investment trusts (REITs); (4) financial institutions withsignificant
exposures to real estate, mortgages, and mortgage-backed securities (banks, and non-bank
lenders); and (5) insurance companies with significant exposures to real estate, mortgages, and
mortgage-backed securities (particularly, monoline insurers and mortgage insurers).
b.
These companies fall within the rubric described by the acronym "FIRE"
- standing for those sectors of the economy involved in Finance, Insurance and Real Estate.
156.
Stanley's bespoke Synthetic CDOs to a standard reference portfolio known as the CDX.NA.IG.3
a. The CDX.NA.IG had been created by a consortium of investment banks
including Morgan Stanley, and Morgan Stanley made an active market in the CDX.NA.IG
during the time the Pinnacle Notes and the Synthetic CDOs were created, issued, and sold.
b.
use in the Pinnacle Notes, the concentration of reference entities exposed to a housing market
downturn was, on average, nearly double the concentration of such reference entities in the
standard CDX.NA.IG reference portfolio.
"CDX" refers to credit default swap; "NA" refers to North America; "IG" refers to investment
grade. The CDX.NA.IG was based, like Morgan Stanley's bespoke Synthetic CDOs, on a portfolio of reference entities - specifically, 125 investment grade North American corporations (e.g., American Express, AT&T, Caterpillar, etc.) chosen by a consortiumof major investment banks including Morgan Stanley. The CDX.NA.IG index was updated twice per year by the same consortium of banks, so that every half year a slightly"new" standard version was created. Each newversion of the CDX.NA.IG was identified witha successive number: e.g., CDX.NA.IG 8, CDX.NA.IG 9, etc. The CDX.NA.IG was traded by banks such as Morgan Stanley in and of itself, but also was traded in tranched form as if Synthetic CDO tranches had been created from
the portfolio of reference entities contained in the CDX.NA.IG.
-41974839.11
Table 3:
6/7
200726
9/10
200741
Homebuilders
3.2%
1.6%
8.0%
7.0% 2.0% 14.0% 8.0% 39.0%
6.6%
4.1% 0.0%
8.0% 4.8%
5.6%
0.8% 8.0%
9.6% 23.2%
Financial
Insurance
13.2%
8.3% 32.2%
16.0% 8.8%
43.2%
Total FIRE
54.0%
157.
classification of all the reference entities included in the Synthetic CDO portfolios and in the CDX.NA.IG, providing the full details underlying the above analysis. See Ex. A ("Class
Complaint") at Appx. B. This exhibit also indicates the specific reference entities that defaulted
in each portfolio, almost all of which were FIRE-classified reference entities.
b.
The above analysis and its broad sector categories understates the degree
to which Morgan Stanley filled its single-tranche CDO portfolios with undisclosed reference
entities at elevatedrisk of default. Within each of the above-summarized broad categories are
further subcategories that entailed greater or lesserexposure to a real estate downturn. Morgan
-42974839.11
158.
brokerage, health, life, casualty, and surety & title. This last subcategory includes insurance
providers particularly exposed to real estate, including providers of mortgage insurance (who
guarantee mortgage payments and become liable for making them in casethe borrower defaults);
159.
and surety and title insurers (i.e., the insurance companies most directly exposed to a real-estate
downturn) in its single-tranche CDOs - nearly four times the concentration of such entities in
the CDX.NA.IG:
-43974839.11
Table 4:
Morgan Stanley 's Bias "owards Insurance Companies Most Direct y Exposed to a Housing ])ownturn
Pinnacle Notes Series
2
3 20075
6/7 200726
9/10
200741
200632
Insurance Subcategories
Monolines /
16.7%
50.0%
72.7%
0.0% 18.2%
30.0% 10.0%
15.0%
Fire/Marine/Casualty
Health Life
0.0% 16.7%
8.3% 8.3%
0.0%
25.0%
Brokerage
Other Total
0.0% 0.0%
100%
0.0% 20.0%
100%
0.0%
100%
12.5% 100%
160.
Because there were relatively few monolines available for Morgan Stanley to
name in its single-tranche CDOs, Morgan Stanley took theextraordinary step of naming some of
them twice within anindividual CDO portfolio (by naming both the corporate parent entity and
an operating insurance subsidiary). For example, the monoline MBIA was named twice in the
single-tranche CDOs underlying Series 3 of the Pinnacle Notes (by including both MBIA Inc.
and MBIA Insurance Corp. as reference entities), and the monolines Ambac and XL were both named twice in the single-tranche CDOs underlying Series 6 and 7 of the PinnacleNotes.
161.
Even before Morgan Stanley had created the single-tranche CDOs and seeded
them with reference entities in these high risk sectors, Morgan Stanley had concluded that the housing boom was turning to a housing bust. By mid-2006, Morgan Stanley's leading economists, including chiefeconomist Stephen Roach, were publicly predicting that an imminent housing bust (already evident in declining home prices) would deepen, inflict losses on
-44974839.11
companies with substantial real estate exposures, and cause the entire economyto experience recession. Concurrently (and not publiclydisclosed at the time), Morgan Stanley's proprietary
trading operations had taken a "bearish" stance towards housing and real estate, and were
predicting - and positioning themselves to profit from - a housing bust. See Michael Lewis, The
Big Short at 202-03 ("Big Short").
iii.
The Single-Tranche CDO Underlying Series 9 and Series 10 of the Pinnacle Notes Reveals Morgan Stanley's Intentions
162.
entities it believed most likely to fail is perhaps most evident in the case of Series 9 and Series 10
of the Pinnacle Notes, which HLF sold to Customers during November 2007 and were issued on
December 14, 2007.
163.
These Pinnacle Notes had as their underlying assets a Morgan Stanley single-
tranche CDO, Morgan Stanley ACES SPC Series 2007-41, whose notes had been issued one day
before the Pinnacle Notes were issued, on December 13, 2007.
164.
Stanley constructed Morgan Stanley ACES SPC Series 2007-41), the severity of the housing bust
had become apparent.
a.
subprime mortgage originators went bankrupt or were acquired for pennies on the dollar, larger
financial institutions announced tens of billions of dollars in subprime mortgage losses, and
home builders suffered an industry-wide collapse.
b. During October, November, and December of 2007, banks and investment
banks revealed further billions of dollars of losses from direct subprime mortgage exposures.
-45974839.11
c.
Morgan Stanley, at the time, was both: (1) aware from its own first-hand
experience ofthe severe losses; and (2) cognizant ofwhich financial institutions were exposed to
large stores of such instruments and their associated losses.
d.
165.
Series 9 and Series 10 of the Pinnacle Notes, Morgan Stanley was aware of the market downturn.
Had it wished to create a safe Synthetic CDO to serve as the underlying asset for Series 9 and
Series 10 of the Pinnacle Notes, it could simply have excluded, or decreased the percentage of,
entities falling within such at-risk sectors as finance and insurance.
166.
SPC Series 2007-41, that went far out of its way to expose itselfto exactly suchknown-to-be-at-
risk undisclosed reference entities. See Ex. A ("Class Complaint") at Appx. C. The 100
undisclosed reference entities Morgan Stanley selected to constitute the reference portfolio for
Morgan Stanley ACES SPC Series 2007-41 included among them, to an even greater degree than
Morgan Stanley's prior single-tranche CDOs, concentrated exposure to such undisclosed
reference entities. Id. Nearly halfof the 100 undisclosed reference entities that Morgan Stanley
included in the underlying portfolio consisted of various financial institutions (banks, investment banks, insurers, reinsurers, monoline insurers, etc.) with large exposures to the housing market.
Id.
167.
entities selected for their risk rather than their lack of it, Morgan Stanley engineered the singletranche CDOs to be more likely to generate portfolio losses and fail. Indeed, the first of the
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CDOs to fail was the last created: the above-discussed Morgan Stanley ACES SPC Series 200741, which failed on or about November 14, 2008, less than a year after Morgan Stanley had
168.
Morgan Stanley structured the Synthetic CDOs' bespoke single tranches to have
a.
tranches that Morgan Stanley structured in the single-tranche CDOs meant that those tranches would become impaired after relatively low levels of aggregate losses in the portfolios
underlying the CDOs.
b.
single tranche. Three of the four single-tranche CDOs featured a single tranche structured to represent a precise and incrediblythin slice of portfolio risk amounting to 0.75% of the total
portfolio (the single tranche in the fourth Synthetic CDO was only marginally thicker at 1.00%). This extreme thinness meant essentially that there was almost no difference between the first and
the last dollar of principal loss.
Table 5:
Morgan Stanley Created Bespoke Single Tranches in the Synthetic CDOs To Be Very Low and Very Thin
Pinnacle Notes
Series
CDO Tranche
Attachment
CDO Tranche
Detachment Point
CDO Tranche
Thickness
Point
Morgan Stanley
Series 2
ACES SPC
Series 2006-32,
Class II
4.30%
5.05%
0.75%
Morgan Stanley
Series 3 ACES SPC
6.20%
6.95%
0.75%
Series 2007-5
-47974839.11
Morgan Stanley
Series 6 and 7 ACES SPC Series 2007-26 4.60%
5.35% 0.75%
Morgan Stanley
Series 9 and 10
ACES SPC Series 2007-41
2.67% 3.67% 1.00%
169.
investment-grade corporations (i.e., "CDX.NA.IG.") that banks including Morgan Stanley traded
featured the following standard Attachment Points and Detachment Points:
Table 6: Standard S Synthetic
Tranche Name
30-100 Tranche
Detachment Point
100%
Super Senior
15-30 Tranche
30%
10%
15%
AA
7%
3%
10%
7%
Junior Mezzanine
0-3 Tranche
BBB
Equity
unrated equity
0%
3%
170.
Pursuantto the Offering Documents, the underlying assets for the Pinnacle Notes
would have an aggregate credit rating of at least AA i.e., the Synthetic CDOs that Morgan Stanley created to serve as underlying assets hadpurported AA ratings.
171. In standardized Synthetic CDO tranches, the closestequivalent to such a AA-
172.
The AA-rated bespoke Synthetic CDO tranches that Morgan Stanley constructed
for use in the Pinnacle Notes were far riskier than equivalently-rated AA tranches of
standardized Synthetic CDOs.
-48974839.11
a.
tranche thickness of 3.00% (the difference between its Attachment Point of 7.00% and its Detachment Point of 10.00%).
i.
Thus, the equivalent tranches of standardized Synthetic CDOs werefour times thicker than the bespoke single tranches Morgan Stanleyconstructed in three of the single-tranche CDOs (3.00% versus 0.75%), and three times thicker than the bespoke single tranche featured in the fourth CDO (3.00% versus 1.00%).
By structuring its CDOs' tranches to be far thinner than normal,
Morgan Stanley constructed them to be far riskier than normal. A .75 to 1.00%) rise in aggregate portfolio losses above the
ii.
Attachment Point would causea 100%o impairment in Morgan Stanley's bespoke Synthetic CDO tranches, but a substantially smaller impairment of 25.0% to 33.33% in the equivalent tranche of standardized Synthetic CDOs - assuming, of course, that the
Attachment Points in the CDOs were the same.
b.
Morgan Stanley also set the Attachment Points so low in the CDOs within
the Pinnacle Notes' underlying assets that the Detachment Point of every single-tranche CDO
was lowerthan the Attachment Point for the equivalent tranche in standardized Synthetic CDOs.
In other words, Morgan Stanley's bespoke tranches in its Synthetic CDOs would suffer 100%
principal impairment before equivalent tranches in standardized Synthetic CDOs would lose
even a dollar.
c.
173.
Synthetic CDOs to each other; and (2) by comparing the Synthetic CDOs, which served as the
underlying assets for the money raised by the Pinnacle Notes, with the Investment Collateral into
which Morgan Stanley reinvested the money raised by the sale of the Synthetic CDOs (which Morgan Stanley sought to preserve until its scheme came to fruition and those funds passed from
Customers to Morgan Stanley).
-49974839.11
i.
Morgan Stanley's CDOs Became Riskier Over Time, Even as the Financial and Housing Crises Worsened.
174.
The last of the single-trancheCDOs that Morgan Stanley created for use in the
Pinnacle Notes - the December 2007 Morgan Stanley ACES SPC Series 2007-41 - should have
featured a higher Attachment Point than Morgan Stanley's prior Synthetic CDOs, because the level of risk in the market had increased significantly since the earlier Synthetic CDOs. 175. Despite the well-publicized downturn in the sectors from which Morgan Stanley
selected the Synthetic CDOs' undisclosed reference entities (discussed above), this CDO had the fewest structural protections. The December 2007 Morgan Stanley ACES SPC Series 2007-41 featured a single tranche with an Attachment Point (2.67%) that was far lower than that of the
three prior Synthetic CDOs (with Attachment Points ranging from 4.30%> to 6.20%).
176. Indeed, the 3.67% Detachment Point for this CDO was itself lower than the
Attachment Points ofallprior single-tranche CDOs associated with the Pinnacle Notes sold by
HLF.
ii.
Morgan Stanley Reinvested the Money Raised by the Sale of the Single-Tranche CDO Notes in a Far More
Conservative Investment.
177.
defaulted, Morgan Stanley needed to preserve the funds it had raised from Customers and other
investors by reinvesting them in an investment collateral (i.e., the investment purchased with the
money raised from the sale of the single-tranche CDO notes that collateralized the CDO
obligations).
178.
As explained above, Morgan Stanley wanted the CDOs to fail. But Morgan
Stanley wanted to preserve the investment collateral so that it would be there for Morgan Stanley
when the undisclosed reference entities in the single-tranche CDOs failed.
-50974839.11
179.
The table below presents, for eachSeries of Pinnacle Notes (a) the Synthetic
CDOs serving as the underlying assets for eachSeries of Pinnacle Notes, and (b) in turn, the
security serving as the underlying assets to the investment collateral:
Table 7:
The Underlying Assets for the Pinnacle Notes and the Investment Collateral Underlying Asset for
Pinnacle Notes Series
Investment Collateral
Morgan Stanley
ACES Series
2007-5
Morgan Stanley
ACES Series
2007-26
Pinnacle
Morgan Stanley
ACES Series
2007-41
(2007-10) Notes (asset-backed securitization of credit card receivables) (CUSIP US 161571 CA05) Capital One Multi-Asset Execution Trust Class A (2006-8) Series Notes (asset-backed
Series 9 and 10
180.
In each case, the investment collateral for the Synthetic CDOs' notes was safer
and more liquidthan the single-tranche CDOs that comprised the underlying assets for the
Pinnacle Notes.
181.
purportedly rated AA, each of the investment collateral for the Synthetic CDO notes was rated
AAA the highest possible credit rating.
a.
market funds. Money market funds investin short-maturity highly-rated obligations. The number of times that money market funds have lost even 1%of capital can be counted on one
hand. Indeed, Morgan Stanley explained that its money market fund was intended "to provide
-51974839.11
liquidity and an attractive rate ofreturn, to the extent consistent with the preservation ofcapital."
See http://www.morganstanley.com/liquidity/usd.html. The substantial liquidity and capital
preservation available through a money market fund are in sharp contrast to the illiquid and risky
Synthetic CDOs underlying Pinnacle Notes 3.
b.
were credit card securitizations. These are asset-backed securities backed by pools ofcredit card
receivables. These particular receivables were the senior-most tranche ofsecurities backed by
such asset pools, and were protected from collateral losses by multiple more junior tranches. In
addition to being a safe and senior security, this type of credit card securitizations is also
extremely liquid for two reasons: (1) specific securities were issued in very large amounts,
which created a large market ofpurchasers and sellers; and (2) issuers regularly issued many series ofnear-identical securities each year, which created substantial market familiarity with
the securities. For example, the credit card securitization connected to Series 9 & 10 of the
Pinnacle Notes was issued in May 2006 in an amount of $300 million, andthat was the 8th such issuance thatyear (all the others were even larger). And the credit cardsecuritization connected
to Series 6 & 7 ofthe Pinnacle Notes was even larger - it was part of a $1.05 billion issuance in
June 2007 (the 10th such issuance that year). The substantial liquidity and capital preservation
available through such credit card securitizations stand in sharp contrast to the illiquidity and risk
Morgan Stanley created in the Synthetic CDOs underlying Series 6, 7, 9, and 10of the Pinnacle
Notes.
2-
182.
HLF has attached a full list ofthe reference entities ineach ofthe Synthetic
-52974839.11
183.
parties, the reference portfolio contents are subject to, and the result of, negotiation between the
parties, each of which has a direct interest in the portfolio's risks. 184.
entities.
185.
Morgan Stanley stood on both sides of every relevant transaction, because the
initial counterparties to the underlying credit default swap agreement that purportedly agreed to
contract over each risk portfolio were all controlled by (and were alter egos of) Morgan Stanley.
In particular, the Synthetic CDO issuing trust, MS Capital, and MS International were all controlled by (and were the alter egos of) Morgan Stanley. 186. At the time HLF sold the Pinnacle Notes, Morgan Stanley had not disclosed, and
HLF was unaware, that Morgan Stanley had concocted the above scheme.
3. Morgan Stanley Created the Single-Tranche CDOs for the Specific Purpose of Receiving the Principal Raised Through Morgan Stanley's
Creation of the Pinnacle Notes.
187.
The financial, logistical, and chronological details surrounding the creation of the
single-tranche CDOs that comprised the underlying assets for the Pinnacle Notes demonstrate
that MorganStanley created them for the specificpurpose of receiving the principal raised from each series of PinnacleNotes. This had been Morgan Stanley's undisclosed plan since the
conception of the Pinnacle Notes.
a.
First, the dollar size of the single bespoke tranche of each of the Synthetic
CDOs matched, exactly, the amount of funds raised through the creation, issuance, and sale of
each series of Pinnacle Notes.
-53974839.11
Table 1
The Matching Issuance Amounts of Pinnacle Notes and Synthetic CDO Notes
Pinnacle Notes
Series
Dollar Amount of
Pinnacle Notes
Issued
Dollar Amount of
Single Bespoke
Tranche CDO Notes
Issued
Morgan Stanley
Series 2
$16.9 million
$16.9 million
2006-32, Class II
Morgan Stanley
Series 3
$24.6 million
$24.6 million
Morgan Stanley
Series 6 and 7
$69.9 million
$69.9 million
Morgan Stanley
Series 9 and 10
$17.9 million
$17.9 million
b.
Second, Morgan Stanley created each single-tranche CDO after the sales
and marketing process had allowed Morgan Stanley to determine the precise amount of funds raised from each Series of Pinnacle Notes, and in conjunction with the creation and sale of each
series of the Pinnacle Notes. In particular, each Series of Pinnacle Notes was marketed and sold
during an "Offer Period" ofapproximately one month, which allowed Morgan Stanley to
determine total investor subscriptions for each Series of Pinnacle Notes. Approximately two
weeks after the Offer Period ended, Morgan Stanley caused a sum of Pinnacle Notes matching total investor subscriptions to be created and officially issued onan"Issue Date" that Morgan
Stanley designated. One day prior to the Issue Datefor each Series ofPinnacle Notes, Morgan
Stanley issued the matching Synthetic CDOs (with single tranche sizes exactly matching the
amount of funds raised from each Series of PinnacleNotes):
Table 2
Chronological and Logistical Coordination of the Pinnacle Notes and the Synthetic CDOs
Pinnacle Notes
| Pinnacle Notes
| Pinnacle Notes
[Underlying
| Synthetic CDO
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Series
Offer Period
10/9/200611/3/2006
Issue Date
Synthetic CDO
Issue Date
Morgan Stanley
Series 2
11/21/2006
ACES SPC
Series 2006-32,
Class II
11/20/2006
Series 3
1/10/2007 2/8/2007
5/18/20076/22/2007
Morgan Stanley
2/16/2007 ACES SPC Series 2007-5 2/15/2007
Morgan Stanley
7/6/2007 ACES SPC
Series 6 and 7
7/5/2007
Series 2007-26
Series 9 and 10 10/29/200711/30/2007
Morgan Stanley
12/14/2007 ACES SPC
12/13/2007
Series 2007-41
188.
Third, the Synthetic CDO tranches were sold to only one purchaser (Morgan
Stanley itself, through PPL), not only because they had been explicitly created for purchase by
PPL, but also because there was no general market for these products. In other words, Morgan
Stanley created and issued only as many single-tranche CDO notes as Morgan Stanley could sell
to captive investors, such as Customers.
VI.
A.
Representations that the Underlying Assets for the Pinnacle Notes uMav Include" Synthetic CDOs Were Materially False and Misleading.
189.
funds to Morgan Stanley. Morgan Stanley intended atall times that the underlying assets would
only be Synthetic CDOs specifically designed by Morgan Stanley. No other asset would provide
the necessary features to enact Morgan Stanley'sscheme, because other assets would have
lacked the necessary swap provisions.
190.
synthetic CDOs as one choice, among other classes ofassets and securities, for the underlying
assets. Specifically, the Offering Documents described investment insynthetic CDOs as merely
-55974839.11
possible, when investment in the Synthetic CDOs was certain. Indeed, the Offering Documents described other possible securities and assets as possible underlying assets: in truth they were
never possible alternatives.
191.
On the Issue Date of a Series of Notes, the Issuer (in consultation with the Determination Agent) will invest the entire proceeds received from the Issue of the Notes of that Series in the purchase of assets as described below. Such assets shall bethe"Original
Underlying Assets" and will, as at the Issue Date of Notes of that
192.
Each ofthe Pricing Statements included, immediately after the cover page and its
notices and immediately prior to the Table ofContents, introductory/summary pages. One of
those pages was represented to be a "Summary of Terms" for each Series of Pinnacle Notes.
They stated:
-56974839.11
193.
ways.
a.
underlying assets would only and always be Synthetic CDOs) asa mere possibility (the underlying assets "may include" Synthetic CDOs). In truth, Morgan Stanley had always intended for the underlying assets to be Synthetic CDOs. As explained above, its scheme in
connection withthe Pinnacle Notes required use of the Synthetic CDOs.
b.
Synthetic CDOs constituted par? ofthe underlying assets, they would not be all ofthe underlying
assets (the underlying assets "may include" Synthetic CDOs). Intruth, Morgan Stanley had
always intended for the underlying assets in their entirety to be Synthetic CDOs - and had in fact
custom-built bespoke single-tranche Synthetic CDOs with those single tranches sized in an amount thatexactly equaled the total amount of principal raised through eachSeries of Pinnacle
Notes.
c.
possible forms ofunderlying assets, including "Cash Deposits," "Certificates ofDeposit," and
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"Liquidity Funds" (akin to money market funds). See Base Prospectus at 24, Pinnacle Notes
Series 2 Pricing Statement at 13-14, Pinnacle Notes Series 3 Pricing Statement at 13-14,,
Pinnacle Notes Series 6/7 Pricing Statement at 31-32, and Pinnacle Notes Series 9/10 Pricing
Statement at 30-31. This represented as possible a matter that was impossible (namely, that the
Underlying Assets would be anything other than Synthetic CDOs).
d.
(cash deposits, certificates of deposit, and liquidity funds) were safe and liquid. This was
intended to suggest, and did suggest, that the Synthetic CDOs with which they had been grouped
were also safe and liquid. Intruth, the Synthetic CDOs were neither, and were thus wholly unlike the other supposedly possible forms of underlying assets with which they had been
grouped. B. The Offering Documents Did Not Disclose that the Underlying Assets Were Single-Tranche CDOs That Morgan Stanley Had Created and in which
Morgan Stanley Possessed an Adverse/Opposite Interest.
194.
International) was the "short" counterparty to the credit default swap underlying the single-
tranche CDOs - i.e., Morgan Stanley bet against the success of the very product that Morgan
Stanley created.
195.
that:
a.
b.
International) ensure thatCustomers' funds were placed into those single-tranche CDOs;
-58974839.11
c.
d.
informed that Morgan Stanley was intending to "invest" Customers' principal in a single-tranche
Synthetic CDOs with risky undisclosed reference entities, low Attachment Points, thin tranches,
and against which CDO Morgan Stanley held a short position, HLF would not have agreed to
sell the Pinnacle Notes.
196.
explanation of, Synthetic CDOs. The Pricing Statements only represented certain purported conditions that Synthetic CDOs would have to meet to serve as underlying assets - including denomination in U.S. dollars, minimum credit ratings ofatleast AA, maturity dates prior to
those of the Pinnacle Notes, and their purported acceptability to MS Capital. See Pinnacle Notes Series 2 Pricing Statement at 13-14, Pinnacle Notes Series 3 Pricing Statement at 13-14, Pinnacle
Notes Series 6/7 Pricing Statement at 31-32, and Pinnacle Notes Series 9/10 Pricing Statement at
30-31.
197.
Morgan Stanley, the statements implied that Morgan Stanley would be selecting already existing
Synthetic CDOs for the underlying assets, when inreality, Morgan Stanley was creating new
Synthetic CDOs for the underlying assets.
b.
on their merits (e.g., the underlying assets had tomeet certain minimum credit ratings), when, in
-59974839.11
truth, the single-tranche CDO underlying assets were selected for their lack ofmerit, i.e., their
propensity to fail.
198.
The Base Prospectus provided further disclosures concerning Synthetic CDOs and
a brief purported explanation oftheir risks (see Base Prospectus at 11-12, 25, and A-16), as well
as vague disclosure of "potential and actual conflicts of interest" between Customers and
Morgan Stanley (id. at 16-17). These disclosures were all materially misleading, for the same
reasons. They failed to disclose that Morgan Stanley had created single-tranche CDOs with
highly risky undisclosed reference entities to be used as underlying assets, and that Morgan
Stanley possessed opposed interests andcounterparty positions to those of Customers.
C. The Offering Documents Failed to Disclose that. Given Morgan Stanley's
Also Undisclosed Adverse Interests and Counterparty Positions in the Synthetic CDOs it Created, Morgan Stanley Custom-Designed for Use as
Underlying Assets Bespoke Built-to-Fail Synthetic CDOs.
199.
As explained above, the Offering Documents failed to disclose that the underlying
assets had not been selected to preserve Customers' principal, but rather to transfer that principal
to Morgan Stanley.
200.
TheOffering Documents also failed to disclose other specific facts (such as the
details, tranche structure, and reference entity portfolios ofthe Synthetic CDOs) that would have
allowed HLF or Customers to fully assess the risks ofthe Pinnacle Notes (and that would have
revealed Morgan Stanley's scheme).
a. A reasonable distributor or investor would have considered these omitted
facts to berelevant, particularly the Synthetic CDOs': (1) undisclosed reference entity
portfolios; (2) Attachment Points; and (3) DetachmentPoints.
b. Such material omissions also rendered affirmative statements made in the
-60974839.11
c.
Synthetic CDOs or their risks, they did, as explained above, represent that the Synthetic CDOs
chosen as the underlying assets would be made based on the merits of those assets. Yet, the
disclosure of the above omitted facts would have made plain that this was not the case. 201. The Pinnacle Base Prospectus contained certain brief representations concerning
synthetic CDOs and their risks. See Base Prospectus, at 11-12. Specifically, the Base Prospectus
stated in passing that akin to the Pinnacle Notes and their Nominal Reference Entities (i.e., the
disclosed reference entities), Synthetic CDOs themselves had reference entities to which they
were credit-linked, and the value of the Synthetic CDOs would depend on the performance of
those credit entities:
Prospective investors should note that if the Underlying Assets for any Series of Notes consist of or include Synthetic CDO. Securities, CDO Squared Securities, or Credit Commodity Linked Securities, the market value of the Underlying Assets of such Series will, amongst other things, depend on the occurrence of credit events or potential credit events in respect of the reference
entities to which such securities are linked.
Whether the principal amount of any Synthetic CDO Security is reduced or otherwise written down will depend on whether one or more credit events in respect of the underlying reference entities of such Synthetic CDO Security occur (and whether any other applicable conditions are satisfied) as well as whether any loss calculations in connection with such credit event(s) exceed any relevant threshold amount. (Base Prospectus at 11) 202. These statements were misleading because they did not state (or otherwise
provide any facts informing investors) that the specific Synthetic CDOs that Morgan Stanley had
created for use in connection with the Pinnacle Notes had been custom-built to intensify the
normal risk of principal/value loss or that this was to Morgan Stanley's advantage. There were
thus at least three material omissions that render the above disclosure misleading:
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a.
First, that Morgan Stanley had filled the Synthetic CDO undisclosed
reference portfolios with reference entities that Morgan Stanley deemed to present elevated risks
of default, thereby intensifying the very risk that the Base Prospectus neutrally and abstractly
described - that "occurrence of credit events" could cause diminution of principal or market
value.
b.
Second, that Morgan Stanley had created the Synthetic CDOs with
abnormally low Attachment Points and thin bespoke single tranches, thereby intensifying the
risk.
c.
Third, that the risks were to HLF and Customers' detriment, but inured to
203.
purported sole discretion as "Determination Agent" to select underlying assets for the Pinnacle
Notes, MS Capital had to deem the underlying assets "acceptable." See Pinnacle Notes Series 2
Pricing Statement at 13, Pinnacle Notes Series 3 Pricing Statement at 13, Pinnacle Notes Series
6/7 Pricing Statement at 31, and Pinnacle Notes Series 9/10 Pricing Statement at 30.
204.
The Offering Documents further explained that MS Capital had to deem the
underlying assets "acceptable" because of its purported interest in such assets (i.e., the underlying assets must be ones "acceptable to the Swap Counterparty [MS Capital] as a funding
source for the obligations of the Issuer [PPL] under the Swap Agreement"). Id.
205. The "obligations of the Issuer under the Swap Agreement" included the
contingent payment to MS Capital, pursuant to the credit default swap between PPL and MS
Capital, should a reference entity default. Were a reference entity to default, PPL would
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liquidate the underlying assets and use the proceeds of the underlying assets' sale to fund its
counterparty payment to MS Capital.
206.
Thus, the plain meaning of this representationwas that MS Capital would deem
the underlying assets to be acceptable insofar as they safeguarded the Pinnacle Note investors'
principal, which was the "funding source" for PPL's obligation to pay MS Capital under the
"Swap Agreement" should a reference entity default.
207. 208.
This representation was materially false and/or misleading. Far from deeming the underlying assets as an "acceptable" safe place to preserve
principal, MS Capital was in fact betting against the underlying assets (the Synthetic CDOs) and
stood to benefit by over approximately $156.2 million from their failure.4 Indeed, aspart of
Defendants' concerted scheme, MS Capital had participated in constructing the Synthetic CDOs so that they would fail, and in failing effect the transfer of Customers' principal to MS Capital
and Morgan Stanley.
209.
With respect to each of these Synthetic CDO tranches, MS Capital was "short":
should defaults in the Synthetic CDOs' undisclosed reference entities rise to breach the low, thin tranches, MS Capital would gain tens of millions of dollars, and up to approximately $156.2 million. This monetary gain to MS Capital would include Customers' lost principal, which MS
International as "Determination Agent" had caused to be invested in the single-tranche CDOs. 210. Thus, MS Capital's interests were directly opposed to those of Customers.
Customers wanted the single-tranche CDOs to succeed and to preserve principal (for return
Customers upon the Pinnacle Notes' maturity). MS Capital wanted them to fail and for the money to default to Morgan Stanley.
4The $156.2 million includes money from all ofthe investors in the Pinnacle Notes, not only
Customers.
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211.
212.
interests would have been aligned with those of Customers: both would have wanted the
underlying assets to preserve principal value, to secure PPL's respective obligations to each (for counterparty payments in case of disclosed reference entitydefault or for principal return upon Pinnacle Notes maturity). Because MS Capital was not interested in the credit protection for
which it had facially contracted, and instead had an undisclosed interest in the failure of the
underlying assets, MS Capital's interests were opposed to HLF's and Customers' interests.
VII. LOSSES SUFFERED BY HLF
213.
approximately $156.2 million from investors. Of this, more 45%) belonged to Customers. 214. In Singapore, financial institutions are regulated by the Monetary Authority of
Singapore ("MAS").
215.
assess, among other things, HLF's liability after the Pinnacle Notes started to fail.
216.
both good business practices and the requirements of the Distribution Agreement. Morgan
Stanley flatly refused to participate, even though Morgan Stanley was aware that MAS could be
imposing liability on HLF.
217.
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218.
MAS instructed Customers to file claims relating to the failure of the Pinnacle
219.
MAS required HLF "to have a rigorous process to look into every complaint and
220.
handling and resolution process" was "serious and impartial" and to "highlight to MAS any
shortcoming in [HLF's] processes ...."
221.
"rigorous process" and under the "independent person['s]" oversight: the payments were not
voluntary.
222.
HLF has paid approximately $32 million (so far) to Customers through the
"rigorous process" mandated by MAS. ThatMAS would require HLF to compensate its
Customers for their losses caused by Morgan Stanley's Pinnacle Notes was the logical,
foreseeable, and proximate result of MorganStanley's actions in connection with the Pinnacle
Notes because, among other reasons:
a.
b.
c.
selling a "defective" product, evenif the distributor had no reason to be aware of the defect; and
e. Morgan Stanley was aware of MAS' broad regulatory power.
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VIII.
COUNTS COUNT I
223.
224.
against any of Morgan Stanley's co-defendants (if any) that ultimately are found not to be
Morgan Stanley's alter ego.
225.
Morgan Stanley & Co., Inc. made, directly and through its control of the co-
Notes constituted a safe, conservative investment, andthatthe purpose of the underlying assets (into which the principal raised by the Pinnacle Notes would be reinvested) was principal
preservation. The Pinnacle Notes would have been unmarketable and would not have been
227.
Offering Documents, which rendered theirrepresentations false and misleading: (i) that Morgan
Stanley, pursuant to a non-arm's-length transaction, was going to investthe funds raised by
investors' purchase of Pinnacle Notes into single-tranche CDOs of Morgan Stanley's own
making, in whichMorgan Stanley held interests directly opposite to those of investors; (ii) the structure and mechanics of the single-tranche CDOs, including the fact that the single-tranche
CDOs had been structured such thateach dollar lostby Customers would be a dollar gained by
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Morgan Stanley; (iii) that the Synthetic CDOs were designed to fail, and thereby redound to
Morgan Stanley's benefit; and (iv) that this was Defendants' plan all along. 228. Morgan Stanley made these false and misleading representations and omissions in
the Offering Documents knowingly, recklessly, without regard for their truth or falsity, and with the intent to induce HLF to rely upon them by marketing the Pinnacle Notes to Customers.
229. Morgan Stanley's conduct was malicious, willful, and wanton because it intended
that its conduct would injure HLF. In the alternative, Morgan Stanley was no less than recklessly indifferent to the possibility that its conduct would injure HLF.
230.
omissions. Indeed, they went to the core of the reasons HLF agreed to market the Pinnacle
Notes - the amount and nature of risk associated with the Pinnacle Notes, and the determination
that the rates of return associated with the Pinnacle Notes adequately compensated investors for
such risks.
231.
HLF had no knowledge of and no way to know that the underlying assets would
be single-tranche CDOs that had been built by Morgan Stanley to fail and, once failing, to effect the transfer of the vast majority of approximately $72.4 million from Customers to Morgan Stanley. HLF believed in and relied upon Morgan Stanley's good faith, among other reasons
because of its roles as creator of the Pinnacle Notes and as selector of the underlying assets into which the principal raised by the Pinnacle Notes would be invested. 232. As a direct and proximate result of HLF's reliance upon the false representations
and omissions of Morgan Stanley, HLF was compelled to pay more than $32 million (so far) to
its Customers to partially compensate them for losses they suffered as a result of Morgan
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Stanley's fraud. HLF also has lost substantial goodwill with Customers and potential customers,
in an amount to be proven at trial.
COUNT II
233.
234.
This Count is asserted against Morgan Stanley & Co., Inc. It is also asserted
against PPL, MS International, and/or MS Singapore if any of those entities is found not to be
Morgan Stanley & Co., Inc.'s alter ego.
235.
Morgan Stanley & Co., Inc. made, directly and through its control of the co-
defendants, materially false and misleading representations and omissions concerning the Pinnacle Notes andthe single-tranche CDOs serving as Pinnacle Notes' underlying assets.
236. Morgan Stanley & Co., Inc. andthe co-defendants named above intentionally and
materially misrepresented to HLF that the Pinnacle Notes constituted a safe, conservative
investment, andthat the purpose of the underlying assets (into which the principal raised by the
Pinnacle Notes would be invested) was principal preservation. The Pinnacle Notes would have
beenunmarketable and would not have been issued but for these misleading statements and
omissions.
237.
Morgan Stanley & Co., Inc. and the co-defendants named above also failed to
disclose the following material information in the Offering Documents, which rendered their
representations false and misleading: (i) that Morgan Stanley, pursuant to a non-arm's-length
transaction, was going to invest the funds raised by investors' purchase of PinnacleNotes into
single-tranche CDOs of Morgan Stanley's own making, in which Morgan Stanley held interests
directly opposite to those of investors; (ii) the structure and mechanics of the single-tranche
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CDOs, includingthe fact that the single-tranche CDOs had been structured such that each dollar
lost by Customers would be a dollar gained by Morgan Stanley; (iii) that the Synthetic CDOs
were designed to fail, and thereby redound to Morgan Stanley's benefit; and (iv) that this was
Defendants' plan all along. 238. Morgan Stanley & Co., Inc. and the co-defendants named above made these false
and misleading representations and omissions in the Offering Documents knowingly, recklessly,
without regard for their truth or falsity, and with the intent to induce HLF to enter into the
Distribution Agreement as a result of them.
239.
Morgan Stanley's conduct was malicious, willful, and wanton because it intended
that itsconduct would injure HLF. Inthe alternative, Morgan Stanley was no less than
recklessly indifferent to the possibility that itsconduct would injure HLF.
240. HLF reasonably relied on the materially misleading statements andomissions.
Indeed, they went to the core of the reasons HLF agreed to market the Pinnacle Notes - the
amount and nature of risk associated with the Pinnacle Notes, and the determination that the rates
of return associated with the Pinnacle Notes adequately compensated investors for such risks. 241. HLF had no knowledge of and no way to know thatthe underlying assets would
be single-tranche CDOs that had been built by Morgan Stanley to fail and, once failing, to effect
the transfer ofthe vast majority ofapproximately $72.4 million from Customers toMorgan
Stanley. HLF believed inand relied upon Morgan Stanley's good faith, among other reasons
because of its roles as creator ofthe Pinnacle Notes and as selector ofthe underlying assets into
which the principal raised by the Pinnacle Notes would be invested.
242.
As a direct and proximate result ofHLF's reliance upon the false representations
and omissions of Morgan Stanley, HLF entered into the Distribution Agreement. Because HLF
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entered into the Distribution Agreement, it has been compelled to pay approximately $32 million
(so far) to Customers to partially compensate them for losses they suffered as a result ofMorgan
Stanley's fraud. HLF also has lost substantial goodwill with Customers and potential customers,
in an amount to be proven at trial.
COUNT III
243.
244.
against Morgan Stanley & Co., Inc.'s co-defendants to the extent thatanyof them is found notto
be Morgan Stanley's alter ego.
245.
Based on its unique and special expertise with respect to the Pinnacle Notes and
underlying assets, Defendants hada special relationship of trust or confidence withHLF, which
created a duty on the part of Defendants to impart full and correct informationto HLF.
246. Defendants materially misrepresented to HLF, in connection with Customers'
investment in the Pinnacle Notes, that the Pinnacle Notes were a safe, conservative investment, and that the purpose of the underlying assets - into which the principal raised bythe Pinnacle
Notes would be invested- was principal preservation. The PinnacleNotes would have been
unmarketable and would not have been issued but for these misleading statements andomissions.
247.
Documents which, among other things, rendered their representations false and misleading: (i)
that Morgan Stanley, pursuant to a non-arm's-length transaction, was going to invest the funds
raised by investors' purchase of Pinnacle Notes into Synthetic CDOs of Morgan Stanley's own
making, in which Morgan Stanley held interests directly opposite to those of investors; (ii) the
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structure andmechanics of the Synthetic CDOs, including the fact thatthe Synthetic CDOs had
been structured such that each dollar lost by investors would be a dollar gained by Morgan
Stanley; (iii) that the Synthetic CDOs were designed to fail, and thereby redound to Morgan
Stanley's benefit; and (iv) thatthis was Defendants' scheme all along. 248. Morgan Stanley was negligent in making these false and misleading
249.
Morgan Stanley breached its duty of care to HLF in making these false and
250.
representations and omissions, HLF has been compelled to payapproximately $32 million (so
far) to Customers to partially compensate them for losses they suffered as a result of Morgan
Stanley's negligent misrepresentations. HLF also has lost substantial goodwill from Customers
and potential customers, in an amount to be proven at trial.
COUNT IV
251.
252.
This Count is assertedagainst Morgan Stanley & Co., Inc. It is also asserted
against PPL and/or MS Singapore, in the event thateither is found notto be Morgan Stanley &
Co., Inc.'s alter ego.
253.
TheDistribution Agreement obligates Morgan Stanley & Co., Inc. (through PPL
and MS Singapore) to compensate HLF for losses incurred in connection with the Pinnacle
Notes.
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254.
Specifically, the Agreement obligates Morgan Stanley & Co., Inc. to "fully and
effectively indemnify [HLF] from and against all losses, liabilities, costs, charges and expenses
arising directly or indirectly outof any claims which are brought against [HLF]." Ex. C
("Distribution Agreement") at ^ 14.1.
255.
As explained above, MAS required HLF to settle the claims of Customers for
losses relating to the Pinnacle Notes. These were "claim[s]" under the meaning of the
Distribution Agreement.
256.
257.
Stanleyasking if it would be willing to participate in the claims process before the MAS that
related to Customers' losses from Morgan Stanley's Pinnacle Notes.
258.
participate. In this letter, he emphasized that MAS would "require" action on HLF's part in the
near future.
259.
260.
Morgan Stanley's refusal breached (or was an anticipatory breach of) its
261.
The Distribution Agreement requires Morgan Stanley to reimburse HLF for all
money paidto claimants (Customers), as well as all "costs, charges and expenses arising directly
or indirectly out of any claim" and "any legal or other expenses."
262.
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263.
As a direct, foreseeable and natural result of Morgan Stanley & Co., Inc.'s, PPL's,
and MS Singapore's breach of contract, HLF has been compelled to pay approximately $32
million (so far) to Customers to partially compensate them for losses they suffered as a result of Morgan Stanley's fraud. HLF also has incurred substantial expenses, including legal fees.
Morgan Stanley is required to compensate HLF for all such claims payments and expenses.
COUNT V
Good Faith and Fair Dealing: Morgan Stanley, PPL, and MS Singapore)
264.
265.
This Count is asserted against Morgan Stanley & Co., Inc. It is also asserted
against PPL and/or MS Singapore, in the event thateither is not found to be Morgan Stanley &
Co., Inc.'s alter ego.
266.
The Distribution Agreement obligates Morgan Stanley & Co., Inc. (through PPL
and MS Singapore) to compensate HLF for losses related to the Pinnacle Notes.
267.
The Distribution Agreement also provides that Morgan Stanley shall not "be
liable in respect of any settlement of any such action effected without its written consent." See
Ex. Catf 14.1.
268.
Morgan Stanley could withhold such consent unreasonably and in bad faith.
269.
It was unreasonable and in bad faith for Morgan Stanleyto refuse to participate in
the MAS claims process after being repeatedly invited to participate by HLF, particularly without providing any reasonable rationale for its decision. Morgan Stanley therebybreached its
implied duty of good faith and fair dealing with respect to the Indemnification Clause.
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270.
money paid to claimants (Customers), as well as all "costs, charges and expenses arising directly
or indirectly out of any claim" and "any legal or other expenses."
271.
As a direct, foreseeable and natural result of Morgan Stanley & Co., Inc.'s, PPL's,
and MS Singapore's breach of the implied covenant ofgood faith and fair dealing, HLF has been compelled to pay approximately $32 million (so far) to Customers to partially compensate them
for losses they suffered as a result of Morgan Stanley's fraud. HLF also has incurred substantial
expenses, including legal fees. Morgan Stanley is required to compensate HLF for all such
claims payments and expenses.
COUNT VI
272.
273.
against any of Morgan Stanley's co-defendants in the event that any is not found to be Morgan
Stanley's alter ego.
274.
This Count is asserted in the alternative, if Morgan Stanley is found not to have a
275.
As explained above, MAS required HLF to compensate Customers for losses they
Customers incurred as a result of Morgan Stanley's wrongdoing. Justice requires that Morgan
Stanley be responsible for paying for the results of its wrongdoing.
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277.
HLF is entitled to assert against Defendants all claims that Customers would have
had, had HLF not provided compensation tothose Customers. HLF incorporates by reference all
claims included within the class complaint as direct claims asserted by HLF against all
Defendants underthe doctrine of equitable subrogation.
RELIEF REQUESTED
(A)
(B)
(C)
(D) The costs of bringing this suit, including reasonable attorneys' fees andcosts as provided by 14.1 of the Master Distributor Appointment Agreement; and
(E)
All other reliefto which HLF may be entitled that the Court deems proper.
JURY TRIAL DEMANDED
David S. Stellings
Jason L. Lichtman
Facsimile:
(212) 355-9592
Attorneysfor Plaintiffs
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