Robbins Geller, Representing China Development Industrial Bank, Announces Suit Against Morgan Stanley for Alleged Fraudulent Subprime CDO Investments

September 14, 2010

Robbins Geller announces China Development Industrial Bank (“CDIB”) has commenced an action in the Supreme Court of the State of New York, County of New York, to recover losses CDIB suffered as a result of its investment in the STACK 2006-1 collateralized debt obligation (the “STACK CDO”).  The Stack CDO was a synthetic collateralized debt obligation (“CDO”) tied to residential mortgage-backed securities.

The scope and nature of the alleged fraud have parallels to Goldman Sachs’ activities with its Abacus CDO that led the SEC to sue Goldman for fraud in a case that was ultimately settled for more than half a billion dollars.

CDIB’s complaint charges several parties, including Morgan Stanley & Co. Incorporated, Morgan Stanley & Co. International plc (f/k/a Morgan Stanley & Co. International Limited) (collectively, “Morgan Stanley”), TCW Asset Management Company, Jeffrey Gundlach, and Louis Lucido with violations of New York law, including fraud.

The complaint alleges Morgan Stanley made bad investments tied to U.S. subprime mortgage bonds and then dumped its toxic investments on the plaintiff, enriching Morgan Stanley at the expense of its “client.”  Morgan Stanley is alleged to have taken what it knew to be toxic and unsafe investments and falsely portrayed the investments as safe in order to avoid losses and instead transfer them to the plaintiff.  The scale of these allegedly fraudulent practices led CDIB to file its first U.S. lawsuit in its nearly 50-year existence.

“Morgan Stanley structured and sold CDIB a security that was a house of cards built on a shoddy foundation of fraudulently manipulated credit ratings,” said Samuel H. Rudman of Robbins Geller, lead counsel for CDIB.

The complaint alleges that the STACK CDO was initially created in August 2006 by Morgan Stanley, which held the Supersenior Swap component of the CDO.  In early 2007, Morgan Stanley sales representatives approached CDIB about transferring Morgan Stanley's Supersenior Swap position.  In April 2007, CDIB accepted Morgan Stanley’s representations and agreed to enter into a transaction in which CDIB committed to fund the Supersenior Swap.  The complaint alleges that representations made to CDIB during the solicitation process were materially false and misleading and that soon after CDIB entered into the transaction, Morgan Stanley began making collateral calls seeking millions of dollars in payments from CDIB.

Recent regulatory actions and government investigations in the United States have revealed systemic manipulations in the formation and promotion of CDOs, including the credit rating process itself and the participation of shortsellers in the selection of reference securities.

CDIB was established in 1959 as the first private development-oriented financial institution in Taiwan.  In 1999 it converted from a trust company into an industrial bank.  In its 50 years of existence, CDIB has remained dedicated to direct investment and corporate banking.  CDIB extends its investment coverage and services to over 100 industries both domestically and abroad, playing a critical role in the Taiwanese venture capital market.

CDIB is represented by Robbins Geller.  Robbins Geller is a 180-lawyer firm with offices across the United States, including New York and San Diego. The firm is active in major shareholder litigations pending in federal and state courts throughout the United States and has taken a leading role in many important actions on behalf of defrauded investors.  The Robbins Geller Web site (http://www.rgrdlaw.com) has more information about the firm.


Dan Newman
T: (800) 449-4900
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