(The Telegraph) - The “rogue trader” Nick Leeson has claimed that Mike Ashley’s legal battle against Morgan Stanley exposes what could be the worst “risk management breakdown” since he triggered the collapse of Barings Bank.
Mr Leeson, the former derivatives trader behind the collapse of the UK’s oldest merchant bank, said Morgan Stanley would have been “asleep at the wheel” if the court case shows that risks related to nearly €220m (£188m) of Mr Ashley’s trades were allowed to build up over weeks.
The comments come ahead of the start of a High Court trial this week between Mr Ashley’s retail empire Frasers and the Wall Street bank in a row over the stock market trades.
Mr Leeson, who amassed $1.4bn in losses through illegal and speculative trades before Barings collapsed in 1995, now advises investors seeking compensation in court when financial watchdogs are unable to help.
The former trader is not involved in the case but described himself as an “interested observer”.
Mr Ashley has accused Morgan Stanley of unfairly demanding exorbitant amounts of money to back up bets placed on Hugo Boss stock, forcing him into a costly restructure of his finances. Morgan Stanley denies it acted unfairly.
Morgan Stanley insists that Frasers’ claim is meritless and has promised a vigorous defence.
On Friday, Morgan Stanley agreed to hand over numerous documents relating to its $1bn trading dispute with Frasers.
The last-minute concession resolved a “long, drawn out and highly contentious” scrap over disclosure that threatened to derail a High Court trial beginning this week.
However, it has stoked concern on Mr Ashley’s side that the court will not get all the documents Frasers believes support the alleged unlawful action it claims were taken against it.
The dispute relates to bets on Hugo Boss stock made by Frasers. The retail group is seeking €50m in damages after Morgan Stanley closed out its share positions in May 2021, forcing a costly trade transfer to rival bank HSBC.
The coming climax of the legal battle sheds what threatens to be an uncomfortable light on the risk processes at one of the largest investment banks in the world.
At issue is a margin call of $1bn that Morgan Stanley made against Frasers trades. Mr Ashley’s business was asked to put up the extra funds to backstop its bet on the stock and guard against a potential 400pc move in Hugo Boss’s share price.
The margin call was calculated and imposed on Denmark’s Saxo Bank, which dealt with Frasers, in late May 2021 before being passed onto Mr Ashley’s company.
Frasers argues that the decision was “arbitrary” and the sum was disproportionate to any risks facing the bank, a position Morgan Stanley disputes.
Public legal filings setting out Frasers’ claim as well as documents discussed as part of pre-trial hearings show the case is likely to centre around Morgan Stanley’s approach to the risk management of these trades.
At the time of the margin call, Morgan Stanley was confronting $911m (£722m) of losses linked to the collapse of Archegos. The New York family office had months earlier defaulted on margin calls after making doomed bets on American media group ViacomCBS.
James Gorman, then Morgan Stanley’s chairman and chief executive, later told CNBC that the Archegos meltdown forced Morgan Stanley to reduce its exposures and reexamine risky “family-office type relationships”.
Frasers began building its stake in Hugo Boss in 2019. They were low risk trades, backed up by stock held by Frasers.
The Sports Direct-owner believed Hugo Boss was undervalued and hoped the investment could improve its relationship with a key supplier to its House of Fraser and Flannels chains.
However, Frasers was unaware that trades placed with Saxo Bank were ultimately executed by brokers at Morgan Stanley.
Frasers took out what are known as call options, which are contracts entitling it to buy Hugo Boss stock at a certain price over a certain period. The options were in essence a bet on the stock rising.
In the weeks leading up to Morgan Stanley’s margin call, the value of Frasers’ call options soared from zero to more than €200m (£171m).
Call logs made public as part of the case suggest some Morgan Stanley bankers were concerned about the time it took to address the risk presented by these trades.
In one call between bankers Dominic Freemantle and Jessica Wright, Ms Wright said: “They have a right to say, well, surely, you should have been quicker. Well, hell, it should have been.”
Another transcript shows Greg Basso, the Stanley risk manager who triggered the margin call, described the Hugo Boss trades as the bank’s biggest single-stock exposure “by a country mile”.
When the matter was flagged to Morgan Stanley’s risk team in New York, they became concerned about Saxo’s underlying client, Frasers, disclosures show.
The retailer was referred to internally as an “activist” investor whose boardroom campaigns could threaten Morgan Stanley’s relationships with other corporate clients, according to call transcripts disclosed to the court by Morgan Stanley.
Some Morgan Stanley executives also appeared to take issue with Mr Ashley personally. One day after the margin call, Henrik Gobel, Morgan Stanley’s head of global capital markets, described as a “bad guy” and compared him to disgraced former Topshop owner Sir Philip Green.
“I think he’s kind of s—,” the banker said of Mr Ashley in a call log disclosed in pre-trial proceedings.
The remarks came months after Simon Smith, Morgan Stanley’s joint global head of investment banking, allegedly denied Mr Ashley a trading account at the bank because of “animus” towards him. Those comments were made public as part of a legal battle to include Mr Smith’s call logs in disclosure for the case. (Morgan Stanley insists it has full discretion to decide on its customers).
Mr Leeson, who worked at Morgan Stanley before joining Barings, suggested the Archegos blowup may have triggered “heightened surveillance [and] heightened scrutiny” across Morgan Stanley.
Morgan Stanley’s internal risk controls have been central to pre-trial court hearings. The bank was rebuked for last month after belatedly disclosing an internal policy relating to the margin call, which for years it denied existed.
Mr Leeson argued it was “ridiculous” for Morgan Stanley to claim policies weren’t in place, given the preponderance of red tape that has grown up since 2008 governing all aspects of banking.
He said: “The regulators have been active since Barings and they’ve been at it again since the global financial collapse in 2008.”
A Morgan Stanley spokesman said: “Frasers has never been a client of Morgan Stanley. This claim is contrived and without merit and we will defend it vigorously.”
By Adam Mawardi
