Morgan Stanley hit with fraud arb claim over $21M in investment losses

The city of Burlington, Vt., filed an arbitration claim against Morgan Stanley with the Financial Industry Regulatory Authority, alleging breaches of fiduciary duty and fraud by that company's investment consulting division that resulted in damages of more than $21 million for the $118 million Burlington Employees' Retirement System.

The city of Burlington, Vt., filed an arbitration claim against Morgan Stanley with the Financial Industry Regulatory Authority, alleging breaches of fiduciary duty and fraud by that company’s investment consulting division that resulted in damages of more than $21 million for the $118 million Burlington Employees’ Retirement System.

In a statement, Morgan Stanley said it will contest the allegations.

Burlington’s claim alleges the Morgan Stanley employees in charge of its account, during a relationship that stretched from 1991 through 2006, engaged in a “pay-to-play” scheme, favoring money managers for Burlington who paid kickbacks to Morgan Stanley while engaging in high-turnover strategies funneled through the company’s brokerage operations.

“Burlington’s initial analysis indicates that Morgan Stanley’s self-interested and imprudent selection of investment managers resulted in the plan’s underperformance of its policy index well in excess of $21 million,” according to the claim. Edward Siedle, an attorney focused on fiduciary issues retained by the city of Burlington, said the city’s initial contract with Morgan Stanley, which called for “soft dollar” payments of at least $28,000 a year, was replaced in 2000 by one with a 15-basis-point fee but trading costs which were supposedly free. In reality, he said, the plan faced excessive trading charges that detracted from performance.

Burlington is asking the arbitration panel to order Morgan Stanley to pay “Burlington, the board and the plan actual damages incurred as a result of Morgan Stanley’s misconduct,” as well as punitive damages.

In an e-mailed response to a request for comment, James Wiggins, a managing director with Morgan Stanley, said: “Morgan Stanley denies the allegations asserted by the city of Burlington and its attorneys regarding the provision of consulting services to the city of Burlington Employees Retirement System. The performance of the city’s retirement fund during the 16-year period that Morgan Stanley served as investment consultant for the fund was favorable and consistent with the benchmarks set by the city. Morgan Stanley is disappointed that the city has decided to pursue this action and plans vigorously to defend against it.”

This story originally appeared in Pensions & Investments, a sister publication to InvestmentNews