NEW YORK - Morgan Stanley shares dropped yesterday following a report that the investment bank is facing an investigation into mortgage derivative deals.
Federal prosecutors are investigating whether Morgan Stanley misled investors about its role in a pair of $200 million derivatives whose performance was tied to mortgage-backed securities, according to a report in the Wall Street Journal. The newspaper said Morgan Stanley sometimes bet against the success of the derivatives, which were underwritten and marketed to investors by Citigroup Inc. and UBS AG.
Shares fell 58 cents, or 2 percent, to close at $27.80.
A spokesman from Morgan Stanley said the bank has not been contacted by the Justice Department about the deals in question and has no knowledge of an ongoing investigation. The spokesman said the bank has not received a Wells Notice from the U.S. Securities and Exchange Commission. The notice informs a company that the SEC's staff is recommending bringing charges against the company.
Morgan Stanley Chief Executive Officer James Gorman said, "We have no reason to believe there is any substance behind any supposed investigation."
The reported probe comes as the SEC is charging Morgan Stanley competitor Goldman Sachs Group Inc. with fraud over that bank's packaging of mortgage securities.