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Morgan Stanley Defends Itself Against Nuns' Lawsuit

Kate Kelly, with reporting by Jesse Bergman|CNBC.com
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Morgan Stanley is responding to a lawsuit related to losses suffered by European investors, including several groups of nuns.

Nearly 90 British Isles investors sued Morgan Stanley for allegedly causing them more than $5 million in losses from complex bond products that went south during the financial crisis.

Earlier this week, the Sisters of Charity of Jesus and Mary in Hertfordshire, England, the Holy Faith Sisters in Dublin, Ireland, and 86 other investors filed suit against Morgan Stanley’s

international arm in a London court. An investment vehicle structured by the firm, the suit argues, handled the investor group’s mounting losses “deliberately or carelessly,” causing them “substantial losses” as a result.

In a statement, Morgan Stanley noted that it sold the product to Bloxham, the Irish brokerage firm that represented the nuns and others. “Questions about the suitability of these notes for Bloxham’s clients is a matter for Bloxham,” Morgan stated. “We believe this entire claim is misplaced.”

A Bloxham official did not respond to requests for comment, but the brokerage has reportedly been a defendant in other suits filed by investors who lost money on the Morgan product.

At the crux of the suit is a structured product Morgan sold in 2005 and 2006 called a constant maturity swap. Secured by a series of bonds issued by the German bank Dresdner (now a part of Commerzbank), the swap was designed to pay out yields of 6.25 percent for five years, and then shift to a variable interest rate in the years that followed.

Early in 2009, the Dresdner bonds underlying the swap were downgraded to junk status—an event that should have prompted Morgan Stanley to sell the bonds immediately, according to the lawsuit.

Nuns Sue Morgan Stanley

Instead, the firm waited five months to sell the Dresdner bonds—during which period the bonds actually rose slightly in value, according to Morgan Stanley, allowing investors to earn some additional money on their sale.

The investor suit argues that the delay deprived Bloxham of an opportunity to buy Dresdner bonds at the earlier date, a move that might have allowed it to restore some of the losses the nuns and other investors had already sustained.

But given that the bonds actually rose in value during that spring, it’s questionable whether such a purchase would have done much to make the investors whole.