In a trial starting on Monday, Morgan Stanley will confront a Russian billionaire’s claims that it illegally short-sold a company based on inside information at the height of the financial crisis.
The lawsuit against the global financial services firm is being brought in Manhattan federal court by Veleron BV, a Dutch company created as an investment vehicle by Russian tycoon Oleg Deripaska, who is also the founder of United Company Rusal Plc, one of the world’s largest aluminum companies.
Veleron claims Morgan Stanley obtained inside information through a relationship it had with the company’s lender.
The dispute arose from Deripaska’s 2007 investment through Veleron in Canadian auto parts maker Magna International. That investment was financed with a $1.2 billion loan from BNP Paribas, with Veleron’s Magna shares as collateral.
Though Morgan Stanley was not directly involved in that loan, it entered into a swap agreement with BNP Paribas under which it assumed some of the risk of the loan in exchange for fixed payments.
On September 29, 2008, with Magna’s stock falling amid the global financial crisis, BNP made a $93 million margin call to Veleron. Morgan Stanley subsequently learned from BNP that Veleron would likely not meet the margin call and would have to liquidate its Magna stock.
That information was forwarded from Morgan Stanley’s global capital markets group to one of its traders, Kerim Tuna, who traded mostly for Morgan Stanley’s own account.
Tuna immediately began short-selling Magna stock, according to court papers. Morgan Stanley stood to lose $6.6 million because of Veleron’s default, but thanks to Tuna’s short-selling, it was able to offset $4.6 million of that.
The lawsuit claims Morgan Stanley’s actions constituted insider trading because Morgan Stanley used its knowledge of Veleron’s impending default for its own benefit days before it became public. The lawsuit claims that the short-selling drove down the price of Magna stock. It seeks more than $10 million in damages.
But Morgan Stanley claims it has no duty to Veleron that could give rise to an insider trading claim, and that it was simply hedging against exposure to risk.
It sought summary judgment dismissing the case, but U.S. District Judge Colleen McMahon ruled in July that it should go to a jury.
Jury selection and opening arguments are expected Monday. Deripaska himself is not expected to testify at the trial, which the parties expect to last about three weeks.
Reporting By Brendan Pierson in New York