Morgan Stanley Cleared of Breach over Mortgage-Backed Securities Holdings

October 7, 2010 ( – Morgan Stanley Investment Management has been granted its motion to dismiss charges it breached its fiduciary duties to a pension plan sponsor by investing some fixed income holdings in mortgage-backed securities.

U.S. District Judge P. Kevin Castel of the U.S. District Court for the Southern District of New York said the complaint by Saint Vincent Catholic Medical Centers and Queensbrook Insurance Limited sets forth no facts that evidence a claim that Morgan Stanley breached its duty of prudence to Saint Vincent. It contains no allegations of inadequacy of Morgan Stanley’s investigation of the merits of its investments.   

Castel pointed out that the complaint includes numerous allegations about the plan’s poor performance during the subprime real estate crash; however, the allegations do not plausibly allege that Morgan Stanley was imprudent in its investigation of the plan’s investment options at the time of investment. “Plaintiffs allegations instead invite Morgan Stanley to be ‘judged from the vantage point of hindsight,’” Castel wrote in the opinion.  

The plaintiffs also alleged that the plan’s portfolio accrued bigger losses than the benchmark in the investment guidelines provided to Morgan Stanley, but Castel pointed out that the complaint does not allege that Morgan Stanley was required to replicate the investments of the Index. “Ultimately, the Fund’s performance did not meet Saint Vincent’s expectations, but that disappointing result is distinct from the diligence in investigating an investment vehicle and the prudence, judged at the time the investment was made,” he said.  

Castel also rejected St. Vincent’s argument that Morgan Stanley did not properly diversify the portfolio by investing more than 60% of the fixed-income portion of the plan’s assets “in a single, proprietary fund of [Morgan Stanley].” According to the opinion, this unidentified “proprietary fund” is not itself alleged to be the basis for the fund’s losses or its inadequately diverse portfolio, nor is there any allegation that the single, proprietary fund was not, itself, diversified.   

Castel pointed out that the mortgage-backed securities holdings were the focus of the claims and noted that of the fixed-income portfolio, 12.6% was invested in mortgage securities in 2007, and approximately 9% in 2008, rather than the higher 60% figure. “The Complaint does not plausibly allege that investing between 9% and 12.6% of a portfolio in a broad investment category – in this case, non-agency mortgage securities – reflected a failure to “diversify[] the investments of the plan so as to minimize the risk of large losses,” the opinion said.  

The case is Saint Vincent Catholic Medical Centers v. Morgan Stanley Investment Management Inc., S.D.N.Y., No. 09 Civ. 9730 (PKC).