Nuns accuse banks in $5m lawsuit - By Harry Wilson

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Germany's Deutsche Bank and US investment bank Morgan Stanley are facing a $5m lawsuit led by a group of Irish nuns.

By Harry Wilson, Financial Services Correspondent
11 Aug 2010

No banker is likely to risk describing what they do as "God's work", but they might hope at least not to get on the wrong side of His earthly followers.

Unlucky then for Germany's Deutsche Bank and US investment bank Morgan Stanley, who are facing a $5m (£3.2m) lawsuit led by a group of Irish nuns.

The Sisters of Charity of Jesus and Mary, the Holy Faith Sisters and the Irish Veterinary Benevolent Fund are among a group of 88 Irish individuals suing the two banks.

The nuns allege Morgan Stanley profited at their expense by failing to redeem an investment linked to the debt of German financial group Dresdner Bank and in so doing cost them millions of pounds.

In 2005 the nuns and other Irish investors bought euro-denominated notes worth €5.88m (£4.8m) linked to Dresdner Bank bonds, but accuse Morgan Stanley of failing to deliver on a contractual pledge to redeem the debt after the German bank's credit rating was cut below an agreed point.

Instead, Morgan Stanley is alleged to have postponed redeeming the notes until the value of Dresdner Bank debt had recovered to a level whereby the US bank would incur no losses, but which the nuns say ended up costing them $4.7m, as well as $718,734.80 in lost interest payments.

Morgan Stanley is alleged to have made an estimated $11.2m gain by delaying the redemption of the notes.

A spokesman for Morgan Stanley declined to comment and said the bank had yet to be served with legal papers by the claimants. Deutsche Bank, which acted as custodian for the notes, didn not comment.

Irish stockbrokers, Bloxham, which sold the notes to the nuns and other investors has not been named as a defendant in the case.

The nuns and other claimants, say that they bought the Hybrid Structured Euro constant maturity swap notes soley on the basis of a term sheet prepared by Morgan Stanley and distributed by Bloxham.

Dresdner Bank debt declined in value as the company was hit by the financial crisis in 2008, which led to it merging with German rival Commerzbank.

A separate lawsuit filed by other investors in the Dresdner notes names Bloxham alongside Morgan Stanley as a defendant.

In February Bloxham joined Morgan Stanley in a lawsuit brought by the Solicitors Mutual Defence Fund relating to an investment in the notes, which named several partners at the stockbroker as defendants in the case.

Bloxham was not available to comment.