[SINGAPORE] Documents and testimony relating to mediation proceedings involving investors of the failed Pinnacle Notes are at the centre of their latest spat with Morgan Stanley in the discovery phase of the lawsuit.
Lawyers for the investors are seeking a protective order from the US District Court in New York to block Morgan Stanley from questioning them about their mediation with distributors of Pinnacle Notes.
They also want to stop Morgan Stanley from obtaining documents related to mediation proceedings before the Financial Industry Disputes Resolution Centre (FIDReC).
They argued that such information is subject to a strict confidentiality agreement, and is of "marginal or no utility because settlement discussions are inadmissible" as evidence under US federal law.
Specifically, the confidentiality agreement requires the investors to not divulge the fact that mediation has occurred, any materials related to the proceedings and the existence and amount of any settlement, as well as the consequences of a breach.
Another reason for the need for confidentiality, the investors say, is that one of the Pinnacle Notes distributors, Hong Leong Finance Ltd, is trying to determine if it has a viable claim against Morgan Stanley Asia (Singapore).
At issue is whether there was alleged misrepresentation in the composition, rating and structure of collateral for Pinnacle Performance Ltd's series 9 and 10 notes.
"Because Hong Leong Finance has taken adversarial positions to the defendants with respect to the Pinnacle Notes, breaching the confidentiality of the FIDReC proceedings in which it engaged would prejudice its interests," Daniel Hume of Kirby McInerney LLP, the investors' lawyer said.
But Morgan Stanley argued that it needs the FIDReC documents to find out the amount of compensation the investors received from the distributors through mediation because such information is unavailable, and also to prevent the potential for double recovery.
Chua Sui Tong of WongPartnership LLC and one of the bank's lawyers, said in court papers that Singapore law would not prevent disclosure of materials covered by the FIDReC confidentiality agreement.
"The FIDReC confidentiality agreement is subject to written law and court orders. . . . The mere fact that relevant documents and information were supplied in confidence by a third party to a litigant is not in itself a ground for withholding discovery," he said.
But the investors disagreed, saying that that was an erroneous contention. "In fact, Singapore authority . . . unequivocally states that a party may not discover materials related to settlement negotiations with a third party."
They said that Morgan Stanley wanted the FIDReC materials so that it might "fish for inconsistencies between plaintiffs' mediation statements and their allegations regarding their reliance on defendants' misrepresentations".
Case in point, Morgan Stanley had claimed that it wasn't responsible for the investors' losses, and couldn't have misled the investors because they themselves didn't read the offer documents, according to court papers.
But that's wrong, they said. "Each plaintiff testified that they read and based their purchase on detailed brochures - which set forth the key terms of the deal - that were part of the pricing statements defendants issued."
In October 2010, Morgan Stanley and several affiliates were sued in New York for allegedly defrauding 18 Singapore investors of US$154.7 million through financial products that were allegedly collateralised by subprime mortgages and Icelandic banks that later failed.
In the suit, the investors, including the Singapore Government Staff Credit Cooperative Society, said that Morgan Stanley had created, issued and marketed the notes as safe, conservative investments.
The investors allege that the defendants didn't tell them that the funds raised from sale of the Pinnacle Notes were re-invested into synthetic CDOs (collateralised debt obligations) that Morgan Stanley "created, designed to fail and bet against". When the CDOs failed, the investors' funds were allegedly transferred to the defendants.
Because the investors were required to buy the notes through third-party distributors that Morgan Stanley retained as brokers, some of the investors sought to recover their losses from them through FIDReC.
According to the latest data from FIDReC, investors in Morgan Stanley's Pinnacle Notes series 1,2,3,5,6,7,9 and 10 filed 516 complaints as at Aug 31, 2011, up from 327 a year ago.