MORGAN STANLEY has become the latest financial group to be hit by the actions of a suspected rogue trader after revealing that a London-based credit derivatives trader had incorrectly valued his positions, forcing the company to take a $120 million revenue hit.
Morgan Stanley, which did not name the individual, said it had discovered the error in May, immediately alerted the Financial Services Authority and suspended the individual pending an internal investigation.
Morgan Stanley declined to comment further.
The trader is suspected of increasing the value of his derivatives book to present his performance in a better light, according to a person familiar with the investigation.
A trader at a rival firm said the Morgan Stanley trader had been involved in short-term trading over credit index options on the CDX index.
The mismarkings could have dated back as far as 2007, another person familiar with the investigation said.
They came to light in a special review of Morgan Stanley’s hard- to-value asset classes, which have few observable market prices.
Colm Kelleher, Morgan Stanley’s chief financial officer, said yesterday that the company had made a $120 million “negative adjustment” to its revenues as a result of the trader’s actions.
Mr Kelleher denied that the problem was symptomatic of a failure of risk management at Morgan Stanley, which last year had to take a $9.4 billion writedown on a bet on mortgage securities.
“I don’t think it is a cultural issue . . . we are much better at picking up these sorts of things than we were,” Mr Kelleher said in an interview after Morgan Stanley reported a 60 per cent fall in second-quarter profits.
John Mack, chairman and chief executive, overhauled the firm’s risk controls after the huge loss on the mortgage trade.
He fired co-president Zoe Cruz and recruiting Kenneth de Regt, a veteran banker, as chief risk officer.
Richard Dunn, a former head of risk at Merrill Lynch, said: “No individual should be allowed that much of an impact on the earnings of the company.
“The checks and balances surrounding the trader ought to have kicked in earlier”.
In March, Credit Suisse confirmed SFr2.86 billion of mismarkings over the fourth quarter of last year and first quarter of 2008 was due to misconduct.
The same month, Lehman Brothers suspended two traders from its exotic equity derivatives desk in London pending a review of positions that could result in markdowns of up to $150 million.
