Takashi Nakamichi and Rie Morita
Thu, August 31, 2023
(Bloomberg) -- Japanese investors sued Mitsubishi UFJ Financial Group Inc.’s joint venture brokerage with Morgan Stanley, showing that the fallout from losses on Credit Suisse’s riskiest debt continue to reverberate around the world.
The suit was filed Thursday to the Tokyo District Court on behalf of 66 plaintiffs, demanding 5.2 billion yen ($36 million) in compensation from Mitsubishi UFJ Morgan Stanley Securities Co. They are seeking to recover losses from so-called Additional Tier 1 notes that were sold by the firm, according to the filing led by Yamazaki Marunouchi Law Office.
Bondholders lost everything when about $17 billion of these securities were wiped out during UBS Group AG’s emergency takeover of Credit Suisse. Some reacted with anger when UBS said this month it won’t need state support for its rescue deal after all. The debacle has sparked various lawsuits around the world, and the latest case in Japan hits its largest lender.
The plaintiffs claim that the brokerage violated a suitability principle by selling the bonds to regular investors even though the products are for professional institutions, according to a copy of the complaint seen by Bloomberg News. The firm also didn’t offer sufficient explanation about the risks associated with the notes, including conditions that could trigger a writedown, it said.
A representative for Mitsubishi UFJ Morgan Stanley Securities declined to comment, saying the firm has yet to see the filing.
In Japan, Mitsubishi UFJ Morgan Stanley Securities sold the securities more aggressively than any other firm, making up about two-thirds of the 140 billion yen of the notes taken up. Its approach contrasts with some major financial companies in Asia including Nomura Holdings Inc. and United Overseas Bank Ltd., which took a more cautious approach.
Bondholders across the world have been trying to seek damages from Swiss authorities for their losses, though the cases in Japan take aim at financial institutions for alleged improper sales practices. Tokyo-based Monex Group Inc. was sued in July by an investor who accused the online brokerage of not giving any explanation about special risks related to the debt.
MUFG has been stepping up efforts to expand its business of managing assets for the rich, with wealth services atop its list of growth strategies since 2021. Its brokerage has said the debt was sold to help clients diversify their portfolios, and that these sales were handled properly for the most part.
Mitsubishi UFJ Morgan Stanley Securities allegedly kept selling the bonds to retail clients after March 15, when Switzerland’s central bank floated the prospect of rescuing Credit Suisse as the firm’s woes deepened, the complaint said. It also allegedly advised the plaintiffs around that time to avoid offloading their AT1s, saying the Swiss lender had adequate capital, according to the complaint.
Plaintiffs were told the notes would be fine as long as Credit Suisse’s key financial health measure stayed at 7% or higher, the complaint said. They were also reassured the debt was safer than stocks, when the opposite essentially held true, it added.
“The defendant clearly has the obligation to compensate for damages,” Taiju Yamazaki, an attorney-at-law at Yamazaki Marunouchi Law Office, said by email. The AT1 bonds hardly suited the plaintiffs while information provided by the brokerage fell short of satisfying the duty of explanation, he said.
The AT1 issue has brought renewed scrutiny on Japan’s financial industry. Criticism has been building that banks and brokers have gone too far in selling risky products to individuals in search of fees. Officials are growing less tolerant of improper sales practices with recent crackdowns on products like structured bonds.
Bloomberg Businessweek
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