The settlement marks the end of Ashley's harassment of the Wall Street investment bank and some of its most senior figures. Photo: Paul Grover
Frasers billionaire Mike Ashley has dropped his legal attack on Morgan Stanley, claiming «snobbery» was behind a $1 billion cash demand that threatened to destabilize his empire.
Frasers and the Wall Street investment bank did it. agreed a settlement after a hearing in February, meaning the High Court will not make any decision. The terms of the settlement are confidential following a trial that would have been costly for both sides.
It marks an anti-climactic end to Ashley's prosecution of Morgan Stanley and some of its most senior bankers.
But the case has not only embarrassed investment banking, which trades at will, but also raised questions about the conduct and policies of one of the world's most powerful financial institutions, which could attract unwanted attention from financial regulators on both sides. Atlantic.
Natasha Harrison, managing partner of city law firm Pallas, said: “This case is likely to be of significant interest to them, both in terms of the level of exposure that was allowed to accumulate and in terms of how the bank behaved in relation to to Frasers himself.»
In his closing arguments in the High Court, Frasers said Morgan Stanley's own witnesses confirmed that internal risk controls were ineffective.
Morgan Stanley already faces regulatory pressure over its internal processes. In January, the U.S. Securities and Exchange Commission charged the bank and its former U.S. equity syndicate executive with fraud related to group trading, a method of selling large volumes of shares.
Morgan Stanley agreed to pay $249 million to settle federal investigations of deception, fraud and compliance violations within its block trading business.
It has also come under fire from Britain's gas and electricity regulator Ofgem, which last year fined the bank £5.4 million after energy traders discussed the business in WhatsApp private messages. It was the first fine imposed under transparency rules designed to protect consumers from market manipulation and insider trading.
Morgan Stanley's dispute with Mr Ashley centered on a demand for $1 billion in cash collateral to cover the risk of its 2021 Hugo Boss share price trades.
Mr Ashley has claimed approximately £40m in damages in the case. an alleged attempt to force Frasers to give up its position in the German luxury fashion house.
Morgan Stanley made a demand known as a margin call, which ultimately required Frasers to contribute additional cash to cover a potential 400 percent change in Hugo Boss's share price.
Ashley, 59, argued the decision was “arbitrary” and the extraordinary sum of money was disproportionate to any risks the bank faced. One of Morgan Stanley's expert witnesses said his analysis did not support the bank's calculations.
The settlement came after the two sides clashed in a two-and-a-half week trial. Mr. Ashley's lawyers argued at the time that the challenge to Morgan Stanley was an unlawful abuse of power and motivated by «snobbery» and a personal grudge against the colorful entrepreneur.
Mr Ashley described Morgan Stanley's margin call in May 2021 as «absolutely incredible» which forced it to outsource trades to rival bank HSBC.
He told the High Court: «You might as well have said it nuclear bomb». landed in Slough — it couldn't happen. You are in complete shock.»
However, Mr Ashley's case was considered difficult to prove because Frasers was not a direct client of Morgan Stanley, which argued it therefore bore no responsibility. The bank calculated and imposed a margin requirement on the Danish Saxo Bank, which entered into a contract with Frasers.
It was through Saxo Bank that Frasers Group sold so-called call options — contracts that give buyers the right to buy Hugo Boss shares at a certain price over a certain period. These buyers were essentially betting that the stock price would rise.
Frasers, which owned shares in Hugo Boss, received payments from the buyers in exchange for these options. The Shirebrook-based company viewed the call options as low-risk trades that were backed by its own stake in Hugo Boss.
Mr Ashley began strengthening Frasers' position at Hugo Boss in 2019. He believed the German retailer was undervalued and the investment could improve ties with House of Fraser and the flannel supplier.
However, Frasers said it was unaware that its Hugo Boss trades placed with Saxo Bank were ultimately executed by Morgan Stanley brokers.
Morgan Stanley rejected Mr. Ashley's claim as frivolous and without merit.
The bank denied it had acted unfairly and instead argued it was entitled to claim protection from the movement of Hugo Boss shares.
But the legal battle has raised questions about the risk management processes at one of the world's largest investment banks.
“We just don’t like him”: Mike Ashley goes to war with Morgan Stanley Read more
Mr Ashley's lawyers questioned how Hugo Boss's trades were allowed to grow for weeks without being noticed before Morgan Stanley made a $1 billion margin call. In the weeks leading up to Morgan Stanley's margin call, Frasers' bets on Hugo Boss had risen from zero to more than €200m (£171m).
Mr Ashley's lawyers argued that Morgan Stanley wanted Frasers to divest from its positions out of a «panic desire to avoid criticism» for missing deals.
Frasers argued that Morgan Stanley's «apparent negligence» was particularly embarrassing because it came months after the lender faced $911m (£722m) in losses related to the collapse of Archegos.
At the time, the US bank was seeking to reduce exposure and renegotiate risky relationships after the Archegos family office in New York defaulted on margin calls after making losing bets on US media group ViacomCBS.< /p>
Morgan Stanley's risk management practices have also come under scrutiny after it said it had no internal policies regarding margin requirements.
Nick Leeson, the “rogue trader” behind the collapse of Barings Bank, said this critical oversight of Hugo Boss trades suggested Morgan Stanley was “asleep at the wheel.”
A former derivatives trader previously told The Telegraph that the claim reveals what could be the «worst failure in risk management» since it triggered the collapse of Britain's oldest merchant bank.
The former trader, who lost $1.4 billion in illicit and speculative trades before Barings collapsed in 1995, was not involved in the case but described himself as an «interested observer.»
The settlement comes at a tense time for Simon Smith, global co-head of investment banking at Morgan Stanley, who was accused of raising a “personal internal objection” to Mr. Ashley opening a prime brokerage account with the lender.
Mr Smith is among Morgan Stanley's advisers to London-listed mining giant Anglo-American in its takeover talks with BHP.
Court documents show Mr Smith told colleagues that Mr Ashley was a «working class boy» who had «zero respect» for the way Morgan Stanley operated.
The dealmaker denied he had a personal grudge against Mr Ashley but admitted he had «reputational and regulatory concerns» about working with him, calling it «highly controversial».
The settlement could cause alarm among Frasers shareholders given the retail giant would still have to pay the billionaire's legal fees.
Morgan Stanley told the High Court that Frasers relied on a «seemingly unlimited» military budget to waste the court's time.
However, Mr Ashley has previously denied claims that he gets «guilt pleasure.» » from legal claims and said it involved the former owner of Newcastle United football club's territory.
A Morgan Stanley spokesman said: «Frasers Group plc and Mr Michael Ashley have withdrawn their claims against Morgan.» Stanley on terms that do not involve payment of funds by one party to the other. Frasers, Mr. Ashley and Morgan Stanley confirm that the disputes between them are resolved.»
Frasers declined to comment.
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