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Mitsubishi's (MUFG) Brokerage JV Faces Lawsuit Over Bond Sale
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Mitsubishi UFJ Morgan Stanley Securities Co., a joint venture brokerage, which is 60% owned by Mitsubishi UFJ Financial Group, Inc. (MUFG - Free Report) and 40% owned by Morgan Stanley (MS - Free Report) , has been sued by retail investors in Japan over the sale of the Additional Tier 1 (AT1) bonds issued by Credit Suisse.
Investors claim that they were not properly informed of the risks involved in the instrument.
In an effort to address customer demand for portfolio diversification, Mitsubishi UFJ Morgan Stanley Securities sold Credit Suisse’s riskiest bonds earlier this year.
However, when UBS Group AG (UBS - Free Report) acquired Credit Suisse, bondholders lost everything because $17 billion of the securities were wiped out. Notably, the acquisition of Credit Suisse was announced by UBS in March in an emergency takeover involving government-backed efforts to fend off panic following the collapse of Silicon Valley Bank.
Thus, on behalf of 66 plaintiffs, a lawsuit has been filed in the Tokyo District Court, wherein investors are demanding 5.2 billion yen ($36 million) in compensation (the difference between the amount paid for the securities and the interest received on them) from Mitsubishi UFJ Morgan Stanley Securities.
Per the plaintiffs, the brokerage firm violated a suitability principle by selling the bonds to regular investors even when the products were inappropriate. Moreover, the brokerage did not provide sufficient explanation about the risks associated with the AT1 bonds.
Investors claim that Mitsubishi UFJ Morgan Stanley Securities kept selling the AT1 bonds to retail clients even after Swiss authorities came up with the prospect of rescuing Credit Suisse after the company’s troubles deepened.
Per the complaint, plaintiffs were told that the bonds would be fine as long as Credit Suisse’s key financial health measure stayed at 7% or higher. Also, they were reassured that the debt was safer than equities, which was not true. Notably, bondholders worldwide have been seeking damages from Swiss authorities for their losses.
Of the 140 billion yen of notes sold in total, about two-thirds of it was sold by Mitsubishi UFJ Morgan Stanley Securities.
Thus, the recent lawsuit has renewed scrutiny on the financial health of Japan. Banks and brokerage firms have gone too far to earn fees by selling risky products to individuals.
Escalating expenses because of a persistent rise in salaries and employee-benefit costs have already been hurting MUFG’s bottom-line growth to an extent. With this lawsuit, an increase in legal expenses will likely put added pressure on the company’s financials.
Over the past six months, shares of MUFG have gained 14.1% on the NYSE compared with the industry’s 3% rise.
Image: Bigstock
Mitsubishi's (MUFG) Brokerage JV Faces Lawsuit Over Bond Sale
Mitsubishi UFJ Morgan Stanley Securities Co., a joint venture brokerage, which is 60% owned by Mitsubishi UFJ Financial Group, Inc. (MUFG - Free Report) and 40% owned by Morgan Stanley (MS - Free Report) , has been sued by retail investors in Japan over the sale of the Additional Tier 1 (AT1) bonds issued by Credit Suisse.
Investors claim that they were not properly informed of the risks involved in the instrument.
In an effort to address customer demand for portfolio diversification, Mitsubishi UFJ Morgan Stanley Securities sold Credit Suisse’s riskiest bonds earlier this year.
However, when UBS Group AG (UBS - Free Report) acquired Credit Suisse, bondholders lost everything because $17 billion of the securities were wiped out. Notably, the acquisition of Credit Suisse was announced by UBS in March in an emergency takeover involving government-backed efforts to fend off panic following the collapse of Silicon Valley Bank.
Thus, on behalf of 66 plaintiffs, a lawsuit has been filed in the Tokyo District Court, wherein investors are demanding 5.2 billion yen ($36 million) in compensation (the difference between the amount paid for the securities and the interest received on them) from Mitsubishi UFJ Morgan Stanley Securities.
Per the plaintiffs, the brokerage firm violated a suitability principle by selling the bonds to regular investors even when the products were inappropriate. Moreover, the brokerage did not provide sufficient explanation about the risks associated with the AT1 bonds.
Investors claim that Mitsubishi UFJ Morgan Stanley Securities kept selling the AT1 bonds to retail clients even after Swiss authorities came up with the prospect of rescuing Credit Suisse after the company’s troubles deepened.
Per the complaint, plaintiffs were told that the bonds would be fine as long as Credit Suisse’s key financial health measure stayed at 7% or higher. Also, they were reassured that the debt was safer than equities, which was not true.
Notably, bondholders worldwide have been seeking damages from Swiss authorities for their losses.
Of the 140 billion yen of notes sold in total, about two-thirds of it was sold by Mitsubishi UFJ Morgan Stanley Securities.
Thus, the recent lawsuit has renewed scrutiny on the financial health of Japan.
Banks and brokerage firms have gone too far to earn fees by selling risky products to individuals.
Escalating expenses because of a persistent rise in salaries and employee-benefit costs have already been hurting MUFG’s bottom-line growth to an extent. With this lawsuit, an increase in legal expenses will likely put added pressure on the company’s financials.
Over the past six months, shares of MUFG have gained 14.1% on the NYSE compared with the industry’s 3% rise.
Image Source: Zacks Investment Research
Currently, MUFG carries a Zacks Rank #4 (Sell).
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.