Morgan Stanley in rogue trade probe

Morgan Stanley on Wednesday became 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 $120m revenue hit.

Morgan Stanley said it had discovered the error in May, immediately alerted the Financial Services Authority and suspended the individual pending an internal probe. Morgan Stanley declined to comment further.

The trader, identified by market participants as Matt Piper, 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. However, the mismarkings could also have been human error.

A trader at a rival firm said the trader had been involved in short-term trading of 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 the company had made a $120m “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 $9.4bn 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, firing co-president Zoe Cruz and recruiting Kenneth deRegt, 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 SFr2.86bn (€1.8bn) 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 in London pending a review of positions that could result in markdowns of up to $150m.