Morgan Stanley did not cheat a company controlled by Russian tycoon Oleg Deripaska by engaging in insider trading at the height of the financial crisis, a US jury found on Friday. The verdict by a federal jury in Manhattan came on the second day of deliberations in a case filed in 2012 by Veleron BV, a Dutch company controlled by Deripaska, owner of industrial group Basic Element.
The jury determined that although Morgan Stanley had acquired inside information and traded on it despite a duty to keep it confidential, the financial services firm did not have the intent to defraud Veleron. Aaron Marks, who represented Veleron, said he was considering a motion to set aside the verdict, although US District Judge Colleen McMahon said she would likely have set aside a jury finding against Morgan Stanley.
"The evidence made it crystal clear that our employees acted in good faith at all times," Morgan Stanley said in an emailed statement. The dispute arose from Deripaska's 2007 investment, through Veleron, in Canadian auto parts maker Magna International . That investment was financed with a $1.2 billion loan from BNP Paribas, with Veleron's Magna shares as collateral.
Morgan Stanley agreed to act as BNP's agent to sell off Veleron's Magna stock if the borrower defaulted, and assumed some of the risk through a swap agreement. Morgan Stanley did not deal with Deripaska or Veleron directly. On September 29, 2008, amid the global financial crisis and with Magna stock tumbling, BNP made a $93 million margin call to Veleron. Morgan Stanley learned the next morning from BNP that Veleron might fail to meet the margin call and have to liquidate its Magna position.
Morgan Stanley acknowledged that one of its traders immediately began short-selling Magna, ultimately offsetting $6.6 million in losses from Veleron's default with $4.6 million in trading profits. Veleron claimed the short-selling was insider trading and drove down Magna's share price. When Veleron's Magna shares were liquidated, the proceeds fell nearly $80 million short of what Veleron owed.
BNP demanded payment, but Veleron had no assets at the time. It eventually paid $25 million to settle BNP's claim. Marks argued at the trial that the settlement would have been less if not for Morgan Stanley's short. The case is Veleron Holding BV v. Morgan Stanley, US District Court, Southern District of New York, No 1:12-cv-05966.