Missouri Department Sues Morgan Stanley Over General Americans Demise
The Missouri Department of Insurance has filed a $4 billion lawsuit in state circuit court against Morgan Stanley & Co. Inc. for alleged fraud, which, the DOI says, caused the demise in 2000 of General American Mutual Holding Company.
Morgan Stanley contracted to provide fiscal advice to GenAmerican, St. Louis, around the same time that another company Morgan Stanley controlled developed a financial product that led to GenAmericans undoing, the lawsuit alleges. Morgan Stanley also was to be the investment banker to GenAmerican for a planned demutualization and stock offering.
GenAmerican was liquidated in 2000 when it was acquired by Metropolitan Life Insurance Company, New York, for $1.2 billion.
The lawsuit against Morgan Stanley was brought by Missouri DOI Director Scott Lakin, as liquidator for GenAmerican. It also named Leonard Rubenstein, a GenAmerican executive, for failing to report the dangers of the GIC products to a company oversight committee.
GenAmerican was forced into administrative supervision in August 1999. It sought the DOIs protection to prevent a run on the bank from institutional investors that had bought funding agreements from the insurer.
GenAmerican held a portfolio of $6.5 billion in guaranteed investment contracts that were part of a joint product development, marketing and reinsurance arrangement with ARM Financial Group, Louisville, Ky.
The run came about after GenAmericans financial rating was downgraded, causing holders of the GICs to “put” their contracts. This meant that General American had to repay 100% of the principal and accrued interest on the GICs on only 7 days notice. The company was unable to liquidate assets fast enough to meet that deadline, forcing it to seek the DOIs protection.
In its lawsuit, which it filed in St. Louis City Circuit Court, the DOI alleged that Morgan Stanleys investment in ARM, plus the fact that it was investment banker to both firms, represented a conflict of interest. The DOI charged that due to this conflict, Morgan Stanley withheld from GenAmericans board the information that the GICs could lead to a run on the bank if the companys ratings were downgraded.
The lawsuit maintains that GenAmerican lost $1 billion in actual value as a result of that crisis, and it seeks up to another $3 billion in punitive damages as well as a return of the fees it paid to Morgan Stanley to advise it. At press time, Morgan Stanley had not returned calls seeking comment.
In a related development, the state DOI was said to be close to an agreement on another lawsuit stemming from GenAmericans demise, according to a source close to the negotiations.
The DOI brought that lawsuit late in 2002 against KPMG, GenAmericans auditing firm, alleging that KPMG advised GenAmerican to market the fatal GIC puts.
Reproduced from National Underwriter Edition, September 23, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.