A group of Singapore investors accused Morgan Stanley of rigging a bond sale related to collateralized debt obligations in order to wipe out their $155 million investment.  In their complaint filed in NY federal court, the 18 investors said they invested in notes issued by Pinnacle Performance Ltd, a Cayman Islands-registered entity, that Morgan Stanley had marketed as "conservative," with an eye to protecting the investors' principal.

Morgan Stanley, instead, allegedly invested the funds into synthetic CDOs of their own making, where the bank itself was counterparty on underlying swap agreements - an arrangement supposedly structured to let the firm gain one dollar for each dollar they lost. 

"Morgan Stanley designed the synthetic CDOs to fail."  ..... "It placed itself on the side guaranteed to win (the "short" side) and placed plaintiffs and the class on the side guaranteed to lose (the "long" side)," it went on. "(It) boils down to a classic bait-and-switch scheme."

The lawsuit - which seks class action status - is the latest challenging banks' creation and marketing of CDOs, following the SEC's lawsuit in April accusing Goldman Sachs of structuring the "Abacus" CDO to benefit hedge fund investor John Paulson at the expense of other investors.  In that case, Goldman agreed to pay $550 million to settle that lawsuit.

On Friday, a separate group of investors sued Credit Agricole SA in a New York state court, accusing the French bank of allowing a hedge fund to select poor assets to back 2 CDOs in which they invested, and did not disclose that the hedge fund was taking short positions. 

Case:  Dandong et al v. Pinnacle Performance Ltd et al, U.S. District Court, Southern District of New York, No. 10-08086.   [Reuters, 10/25]