Morgan Stanley wins legal battle over a 'sinking ship' CDO

Morgan Stanley has won a dismissal of a pension fund’s lawsuit over a $1.2 billion CDO, according to reports. Employees' Retirement System of the Government of the Virgin Islands alleged that the bank had misled investors over the CDO known as Libertas and colluded with rating agencies Moody’s and S&P to obtain a triple-A rating on the senior notes. It further claimed that Morgan Stanley successfully shorted the notes to profit as the CDO’s value collapsed.

According to Reuters, the pension fund claims that Morgan Stanley should have given more than just a generic warning in the CDO docs that rising delinquencies ‘may’ cause losses. Drawing parallels with the Titanic, the pension fund stated that this was like the Titanic’s captain informing passengers that the ship may sink because others had, while concealing that the ship had struck an iceberg.