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Prosecutors Begin Investigation into Morgan Stanley's "Dead Presidents" Deal

David P. Meyer, Esq.

Following closely on the heels of the SEC’s April investigation into Goldman Sachs, U.S. prosecutors are now looking into whether Morgan Stanley may have misled investors regarding mortgage securities, according to the Wall Street Journal.

Prosecutors believe Morgan Stanley may have placed bets against collateralized-debt obligations (CDOs) that it arranged and marketed to its investor clients without properly representing its role in the process. Among the deals under investigation are two dubbed the "Dead Presidents" by traders because they were named after the U.S. Presidents James Buchanan and Andrew Jackson. While Morgan Stanley did not market the "Dead Presidents" deals, the firm did help create them and then bet against them.

Morgan Stanley is one of more than a dozen Wall Street Firms that were the subject of a 2009 SEC civil-fraud investigation focused on practices related to mortgage-bonds.

While the U.S. prosecutors’ investigation into Morgan Stanley is in its preliminary stages, the firm’s stocks had already fallen 2.04% on Wednesday, according to the Huffington Post. James Gorman, CEO of Morgan Stanley, asserts that the firm has nothing to worry about. "We have no reason to believe there is any substance behind any supposed investigation," he said.