x Abu Dhabi, UAEMonday 22 January 2018

ADCB ends legal battle with Morgan Stanley over soured investment

Abu Dhabi Commercial Bank has settled a long-running lawsuit with Morgan Stanley and two leading ratings agencies, alleging it was misled about investments that soured during the US subprime mortgage meltdown.

A view of the Morgan Stanley headquarters in New York's Times Square. Brendan McDermid / Reuters
A view of the Morgan Stanley headquarters in New York's Times Square. Brendan McDermid / Reuters

Abu Dhabi Commercial Bank has settled a long-running lawsuit with Morgan Stanley in which ADCB alleged that it had been misled about investments that soured during America's subprime mortgage meltdown.

ADCB also settled with Moody's Investors Service and Standard & Poor's, the ratings agencies it had claimed were responsible for understating the risk involved in the deals.

A notice filed in a federal court in Manhattan said all parties had voluntarily dismissed the court action. A similar case led by King County, Washington, was also dropped.

It brings to an end a 56-month legal battle in which ADCB had sought compensation for its losses in a structured investment vehicle called Cheyne.

Nobody was available to comment from ADCB yesterday.

Investors will want to know the terms of the settlement, said Tariq Qaqish, the head of asset management at Al Mal Capital in Dubai.

"But as a first glance, I would say it's positive that a lengthy process has come to an end and that parties have agreed on compensation. It will be worth looking at how much ADCB have provisioned for losses on their investments, and how much they will reverse those provisions," Mr Qaqish said.

When ADCB filed the lawsuit in August 2008, it said it had lost nearly Dh1 billion in investments in debt markets tied to subprime mortgages in the United States.

ADCB claimed that Moody's and S&P had given inflated ratings to a group of notes backed by subprime mortgages. Compensation paid to the ratings agencies was based on the notes receiving the desired ratings, ADCB alleged.

ADCB further claimed Morgan Stanley had been negligent in conveying ratings it should have known were inaccurate.

The US district judge Shira Scheindlin in Manhattan had said on October 5 that ADCB and other investors in Cheyne could proceed with allegations that Morgan Stanley was responsible for passing along inflated ratings on the notes.

Settlement terms were not disclosed in the filing on Friday.

ADCB, King County and other investors had sought $638 million of damages linked to losses they claimed to have suffered when the Cheyne vehicle went bankrupt in August 2007.

A trial on the ADCB claims had been scheduled to begin on May 6, according to court documents.

ADCB's stock has gained more than 13 per cent over the last six trading sessions to reach its highest level since August 2008.

The bank has posted a 4 per cent rise in first quarter net profits to Dh829.4m. Most of the year-over-year rise came from the unwinding of hedges previously made by banks.

Leading international banks and credit rating agencies have come under fire since the global financial crisis led to people and businesses around the world losing money on soured investments. In particular, ratings agencies have been accused of providing misleading ratings on mortgage-backed securities in an attempt to gain business.

"We're pleased to have settled these cases," Mark Lake, a spokesman for Morgan Stanley, was quoted as saying by Bloomberg.

"McGraw-Hill has settled the Abu Dhabi and King County cases without any admission of liability or wrongdoing," Jason Feuchtwanger, a spokesman for McGraw-Hill, the parent company of S&P. was quoted as telling the newswire. "The terms of the settlement are confidential."

"This settlement allows us to put the significant legal defence and related costs, as well as the distraction, of these very protracted litigations behind us," Michael Adler, a Moody's spokesman, was quoted as saying. "We are satisfied that it is in the best interests of our company and shareholders."