The Wall Street Journal has reported that, according to 'people familiar with the matter', US Federal prosecutors are now examining whether Morgan Stanley misled investors when selling certain CDO deals.
Although the probe is thought to be at an early stage, the newspaper's sources say that it is focusing on two CDO deals, known among firm traders as the 'Dead Presidents', named after former US Presidents James Buchanan and Andrew Jackson. The firm is said to have been out arranging and selling these deals to investors at the same time some of its traders were allegedly betting that their values would fall.
Morgan Stanley will be keen to get ahead of the curve on this, as these are the same kind of products that are at the centre of Goldman's current problems, and which have knocked $20bn off Goldman's market cap in recent weeks. Morgan Stanley's stock was down 5% in early trading in New York Wednesday.
James Gorman, Morgan Stanley's CEO, said at a press conference in Tokyo Wednesday: 'We've not been contacted by the Justice Department about any transactions that were raised in the Wall Street Journal article, and we have no knowledge whatsoever of a Justice Department investigation'. Gorman added: 'We have no reason to believe there is any substance behind any supposed investigation'.