Morgan Stanley sued by LV gaming executives

Friday, Aug. 4, 2000 | 10:39 a.m.

Las Vegas gaming industry executives sued Morgan Stanley Dean Witter & Co. on Thursday, accusing the Wall Street securities giant of fraud in the sale of a security backed by corporate loans.

The lawsuit was filed in Clark County District Court by William Richardson, vice chairman of Mandalay Resort Group; David Belding, senior vice president of Mandalay Development; FBO Fertitta Revocable Family Trust and its trustees Frank J. Fertitta and Victoria Fertitta.

The Fertitta family controls Station Casinos Inc.

The plaintiffs sued as individuals, their companies are not involved in the lawsuit.

The lawsuit alleges fraud, negligent misrepresentation, breach of oral contract and gross negligence and recklessness in Morgan Stanley's marketing of Class I Subordinated Notes beginning in 1997; and in Morgan Stanley's management of the notes' underlying investments in corporate loans.

The suit said Van Kampen CLO I, Ltd., a Morgan Stanley subsidiary, issued $131 million of Class I Notes and senior notes totaling more than $500,000.

Richardson and Belding each purchased $5 million of Class I Notes while the Fertitta trust purchased $10 million in notes, the lawsuit said.

Money raised from investors, including the Las Vegas gaming executives, was used to buy corporate loans and package them into a loan portfolio managed by Van Kampen Management Inc., a Morgan Stanley subsidiary, the plaintiffs said.

The suit said that while Morgan Stanley representatives touted a hypothetical annual return from the investment of as much as 11.68 percent, the investment performed poorly, resulting in a return of just 2.45 percent on the first coupon payment and 4.98 percent on the second payment.

The gaming executives alleged Morgan Stanley failed to disclose that the investment had two underlying flaws making it impossible for the fund to meet its objectives: corporate loans are frequently paid off early with no penalty, reducing interest income to the note holders; and the fund can't be fully invested at all times because of the time required to find new loans to replace paid-off loans.

The suit also alleged Morgan Stanley falsely promised there would be a good opportunity to sell the Class I notes for a profit in a secondary market and that if no market developed, Morgan Stanley would stand by the notes and make a reasonable offer to purchase them.

The plaintiffs said that when they became dissatisfied with the investment or when they received margin calls and tried to sell the notes, there was no market and Morgan Stanley failed to make a reasonable offer to buy them.

The lawsuit also alleged the investment program had to compete with another Morgan Stanley collateralized loan obligation program for a limited number of commercial loans suitable for purchase; and that the loan portfolio was without a full-time fund manager for nearly six months -- a period in which several large loans allegedly began to deteriorate.

"To generate large commissions and fees for themselves, the defendants sold the Class I Notes, in furtherance of their Collateralized Loan Obligation Program, to the plaintiffs by the use of fraudulent, false and deceptive means and practices, causing substantial damages and loss to the plaintiffs," the lawsuit said.

Morgan Stanley officials couldn't be reached for comment this morning on the allegations.