Documents filed in the U.S. District Court for the Southern District of New York, where the suits have been consolidated, say the firm wants to settle to avoid the expense and risks of prolonged litigation.
U.S. District Judge Victor Marrero, who is presiding over the suits, has given preliminary approval to the $6.5 million settlement between Morgan Stanley and lawyers who represent the issuers in the consolidated lawsuits, which are seeking treble damages on behalf of states and localities that have bought muni bond-related guaranteed investment agreements and other investment products or derivatives in the past 20 years. Those lawsuits stem from allegations of industry-wide bid-rigging and price-fixing by more than thirty broker-dealers, banks, and insurance companies.
Morgan Stanley’s settlement would include a $4.95 million payment to settle the litigation and $1.55 million for costs and fees associated with publicizing the resolution to potential claimants, including state and local governments that have purchased muni derivatives since Jan. 1, 1992.
Morgan Stanley, which has said in court documents that it believes it is not liable and has good defenses to the allegations, also agreed to cooperate with the issuers’ lawyers in their litigation against the remaining firms.
“The court finds that the settlement agreement was entered into at arm’s length by highly experienced counsel and is sufficiently within the range of reasonableness that notice of the settlement agreement should be given as provided in this order,” Marrero wrote in the ruling last January that granted preliminary approval to the deal.
A Morgan Stanley spokesperson declined to comment on the settlement.
Lawyers representing the state and local governments in the lawsuits did not respond to phone calls seeking comment.
Morgan Stanley is the first firm to forge a settlement with the issuers’ lawyers.
The tentative settlement springs from litigation that parallels allegations in ongoing probes by federal and state regulators of alleged bid rigging of muni investment contracts, including a criminal investigation spearheaded by the Justice Department.
Since last December, three firms — Bank of America Securities LLC, now Bank of America Merrill Lynch, UBS Financial Services Inc., and JPMorgan — have paid more than $525 million to settle antitrust, securities fraud, tax, and other charges with state and federal regulators, including the DOJ, the Securities and Exchange Commission, the Internal Revenue Service, the Office of the Comptroller of the Currency, the Federal Reserve Board, and roughly two dozen state attorneys general. The firms have neither admitted nor denied the charges in settlement documents.
The second amended complaint in the issuers’ lawsuits, filed in 2009, relies in part on information obtained from Bank of America, including a former BOA employee, referred to as “a confidential witness,” who is cooperating with the DOJ. BOA, UBS, and JPMorgan are also named as defendants in the issuers’ lawsuits.
Issuers who want to opt out of the Morgan Stanley settlement must do so by Oct. 11. They would have to file a written request for exclusion, outlining certain key information, including a description of the muni derivatives they have purchased since Jan. 1, 1992, the provider, the date of the transaction, and the notional amount of the derivatives.
Issuers who opt out would be barred from sharing in the settlement proceeds, which are to be held in escrow and distributed at a later date. They also would have to pursue any claims against Morgan Stanley at their own expense.
Oct. 11 is also the deadline for issuers who want to object to the settlement, in writing or in person, or who want to request permission to speak at a fairness hearing scheduled for Nov. 23.
Under the proposed Morgan Stanley settlement, issuers who don’t opt out can wait for more information. If they bought muni derivatives during the time period covered by the lawsuit, they would need to file a claim at a later date in order to receive a payment.
Separately, in late June, Marrero approved a plan for sending a nine-page notice outlining the Morgan Stanley settlement to state and local governments. He ordered the lawyers to mail the notice by July 11.
Marrero also approved shorter notices and banner ads for publication in print and online, including on web sites such as www.MunicipalDerivativesSettlement.com and on The Bond Buyer’s website.
At the Nov. 23 hearing, Marrero will consider any objections and decide whether the proposed settlement is “fair, adequate, and reasonable” and should be given final approval, according to court documents.
Meanwhile, court papers suggest lawyers for the state and local governments have resolved to move on, at least where Morgan Stanley is concerned.
The 36-page Morgan Stanley settlement agreement, submitted to the court for approval late last year, says the DOJ has not identified the firm as an alleged co-conspirator in its bid-rigging probe.
The DOJ’s indictment against CDR Financial Products Inc., a broker of guaranteed investment and derivatives contracts, alleges that CDR and several of its former officials conspired to rig the bidding process to ensure certain firms would win the bids in exchange for undisclosed kickbacks, disguised as “hedge fees.”
In addition, the issuers’ lawyers have said in court documents they did not unearth evidence of wrongdoing by Morgan Stanley in their own investigations.
For example, the court-approved notice says the issuers’ lawyers have not “discovered any meaningful evidence that Morgan Stanley participated in the alleged conspiracy.”
The settlement agreement also says the issuers’ lawyers concluded, after “due investigation” and “carefully considering the relevant circumstances,” including the legal and factual defenses and the law, that settlement was “in the best interests” of the state and local governments. In particular, the agreement notes, settlement would “avoid the uncertainties of litigation.”
Morgan Stanley made a similar calculation.
The settlement agreement says the firm believes it is not liable and has good defenses to the litigation, but is agreeing to settle to “avoid further expense, inconvenience, and the distraction of burdensome and protracted litigation.”
Morgan Stanley also is seeking “to put to rest this controversy” and “avoid the risks inherent in complex litigation,” the agreement says.
Still, for state and local governments who might be eligible to participate in the settlement, uncertainty remains.
“It will take time to determine how much successful claimants will receive,” the court-approved notice says. “This process could take several months or longer. Please be patient.”