The Government Employees' Retirement System (GERS) of the United States Virgin Islands filed a $1.2 billion suit against Morgan Stanley last week for allegedly pillowing CDO ratings and marketing investment products it expected to fail.

According to a Dec. 24 lawsuit filed in Manhattan federal court, the Caribbean pension fund accuses the Wall Street bank of collaborating with credit rating agencies to obtain a triple-A for CDO notes it called the “Libertas CDO,” Reuters reported.

No credit agencies were named in the suit, the news service stated.

Additionally, the complaint stated that the CDO scheme was supported by securities issued by lenders that went bankrupt during the subprime mortgage debacle. It also implies that Morgan Stanley knew the CDO’s assets were riskier than noted in the credit rating.

It was “highly motivated to defraud investors” because it was “shorting” the assets, the court document said.

“Morgan Stanley was betting the entire investment it was promoting would fail,” Reuters quoted from the complaint yesterday. “The firm achieved its objective.”

Erica Platt, a Morgan Stanley spokesperson, declined comment on the matter.

Investment Management Weekly’s attempts to reach GERS Administrator Austin Nibbs, and Pedro Williams, the system’s attorney, were unsuccessful as of press time.

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