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Morgan Stanley sued for losing $5 million from two super accounts

Investment bank Morgan Stanley Smith Barney is being sued after it lost approximately $5 million from two clients’ multi-million superannuation accounts through high-risk option trading.

Helen Sedman, 74, and her business partner Sally Middleton, 61, are both suing the bank, alleging they were deceived by their Morgan Stanley broker Kate Kearney into believing an option trading was a low-risk option.

As a result of the risky options trading and fees, more than 97% of Middleton’s account was gone and 90% of Sedman’s was wiped.

Middleton’s account declined from $1.2 million to just $34,000 and Sedman’s dropped from $4.8 million to $950,000 in just two months.  On top of these hefty losses, the plaintiffs paid Morgan Stanley $1.1 million in fees.

The plaintiffs allege Kearney’s conduct was “reprehensible, misleading and deceptive” and the trading was undertaken for primary purpose of garnering fees from Sedman and Middleton.

A statement of claim has been filed in the Victorian Supreme Court.

Practice group leader at law firm Slater and Gordon, Mark Walter, is representing the pair and told SmartCompany the majority of money was lost from both womens’ super accounts following the risky investment decisions of Kearney.

“Both plaintiffs followed their broker Kate Kearney from CBA to Morgan Stanley and they wanted safe long term investments for their super funds. They hadn’t traded in options before and were recommended an options trading strategy which Kearney told them was low risk.

“What unfolded was a fairly aggressive trading strategy which resulted in a loss of nearly $5 million in total for the both of them. It also resulted in high commissions for Kearney as the brokerage for Sedman’s account was $379,000 and for Middleton’s it was $188,000,” he says.

Walter says the turnover on both accounts was “fairly spectacular” and in January 2012, the total options premium turnover was $323 million for Sedman’s super fund, with it frequently turning over $25 million to $40 million in a month.

The plaintiffs are alleging the trading was excessive and aligned to generate brokerage for Kearney and she failed to act in the best interests of her clients.

“The statement of claim makes a number of allegations, including a breach of a retainer (the contractual obligations), a breach of duty of care, a claims the broker was acting in her own interests contrary to the interests of the client and a misrepresentation claim which states the clients were told the trading was low risk and matters were under control,” Walter says.

A spokesperson for Morgan Stanley told SmartCompany it will "vigorously defend any allegations".

Walter says the precise value of damages is currently hard to determine as he’s waiting to receive relevant documents from Morgan Stanley.

“It’s extremely difficult for the individuals to be able to identify their net position because so few people have an understanding of options trading.

“They were led to believe it was safe and secure, so there is also a claim for exemplary damages. The plaintiffs are entitled to this when the conduct is so egregious, the court can award extra damages in relation to this,” he says.

Sedman and Middleton are also alleging Morgan Stanley failed to stop Kearney’s aggressive trading, despite it being highlighted by the risk management division.

Simple options trading involves buying and selling stock at a specified price, but there are a number of complexities which often make the process risky and difficult to understand.

“It can be very hard to understand the documentation you’re given and the extent of exposure. The plaintiffs received assurances and wouldn’t have proceeded if they knew the true extent of the exposure. They both found it very difficult to understand their position in the course of the trading,” Walter says.

Yolanda Redrup

Journalist

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Yolanda is a SmartCompany reporter who has a knack for covering business misconduct and retail issues. Previously, she was the editor of RMIT's student magazine Catalyst. Follow her on twitter: @YolandaRedrup
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