[ by Melanie Gretchen and Howard Haykin ]

Lawsuits filed by participants in Morgan Stanley retirement plans were dismissed Thursday by a Federal Judge in Manhattan, who agreed that the firm did not violate any duty of prudence.

The plaintiffs accused Morgan Stanley of mismanaging some plans by allowing their money to remain in its stock even as its performance faltered in 2008.  They contended that Morgan Stanley officials knew of the growing risks of holding onto the shares, and therefore should have warned participants and, concurrently, should not have been matching their contributions with company stock through the bank's 401(k) and ESOPs (employee stock ownership plans) from late 2006 through 9/30/08.

Among the risks noted by the plaintiffs, were: (i) $9.4 billion of mortgage securities-related write-downs in 2007;  (ii) increased market volatility resulted in the 2008 collapse of Bear Stearns, and bankruptcy of Lehman Brothers Holdings.

However, U.S. District Judge Deborah Batts ruled that ...   the Morgan Stanley did not violate any duty of prudence by continuing to offer its stock in the plans.  Rather, the plan participants had reason to believe in the bank's survival by its profitability in the first 3 quarters of 2008, net revenues of $23 billion, and the $9 billion investment in Morgan Stanley by Mitsubishi UFJ Financial Group near the end of that period. 

[C-I Note:  C-I vividly recalls predicting on a Friday that Morgan Stanley was not going to make it through the weekend.  Mitsubishi, however, came through and rescued the firm, which at the time was led by John Mack.] 

The Judge, however, granted plaintiffs the opportunity to revise their complaint(s), and litigate on narrower claims.

The cases: Coulter et al v. Morgan Stanley et al, U.S. District Court, Southern District of New York, No. 11-01849; and In Re Morgan Stanley ERISA Litigation in the same court, No. 07-11285.

For further details, go to [Reuters, 4/1/13].

To contact Melanie Gretchen: melanie@compliance-insights.com.