Morgan Stanley sued over $5m super losses
Court documents reveal that Morgan Stanley reaped more than $1.1 million in fees across two funds, controlled by 74-year-old Helen Sedman and her business partner, 61-year-old Sally Middleton.
After a series of losing options trades and fees were deducted, more than 97 per cent of the balance of Ms Middleton's $1.2 million super account with Morgan Stanley was wiped out.
Ms Middleton was left with just $34,000 in the account.
The balance of a second fund, in Ms Sedman's name, fell from $4.8 million to $950,000 in just two months, after losing options trades, mainly in mining stocks.
The losses have put the retirement security in doubt for both claimants, who have filed two suits against Morgan Stanley in the Supreme Court of Victoria. In statements of claim, the pair allege that the investment bank and stockbroker Kate Kearney engaged in misleading and deceptive conduct by trading heavily on options and derivatives, against instructions, for the "primary purpose" of generating fees and concealing losses in the portfolios.
"The defendant engaged in high-volume risky trading which put at risk the entire or a substantial amount of the funds within the super fund, yet it never adequately advised the super fund trustee of the nature of those financial derivatives or explained the degree of risk," Ms Sedman claims.
The plaintiffs also allege Morgan Stanley did not stop Ms Kearney's increasingly aggressive trades despite the volume of activity being flagged by Morgan Stanley's risk management division.
At one stage, Ms Kearney had allegedly allowed exposure on Ms Sedman's $4.8 million account to blow out to $7 million. Within two months, the value of the account had fallen $3.89 million to just $950,000, court records show.
Trader David Waterhouse - one of the biggest private writers of options trades in the country - described betting an individual's retirement savings on the options market as "an act of insanity".
"About 1 per cent of the population have the knowledge and the risk appetite to be able to trade options effectively," he said. "It's a high-risk market. I always say, when it comes to retirement investing, it's horses for courses. Some people can afford risk, but the majority should bet safe. Options trading is not a safe bet."
Following the steep losses, Ms Sedman and Ms Middleton met Ms Kearney and the broker allegedly said her investment strategies were "low risk".
But when Ms Sedman instructed Ms Kearney to stop trading in options the following month, Ms Kearney reportedly said "she could not get out of the investment exposure the super fund was in and it was not the time to get out". "Everything is under control," Ms Kearney reportedly said.
Ms Middleton, who liquidated her account in December 2011, has estimated her losses at $1.15 million. Ms Sedman believes she lost about $4.2 million.
The writs claim that only a "broad estimate" of the loss and damage can be provided as Morgan Stanley has refused to provide a complete record of trading.
"Kearney provided in her own format monthly trading statements to the super fund trustee ... which conflicted with summary statements provided by [Morgan Stanley's] accounting system," Ms Middleton also alleges.
Kate Kearney and Morgan Stanley could not be reached for comment.
cvedelago@theage.com.au Twitter: @chrisvedelago
Frequently Asked Questions about this Article…
The lawsuit concerns investment bank Morgan Stanley Smith Barney being sued after more than $5 million was lost from the super accounts of two private clients. The plaintiffs allege aggressive, high‑risk options and derivatives trading wiped out large portions of their retirement savings, raising questions about how risky strategies were used inside a super fund.
The plaintiffs are Helen Sedman (74) and her business partner Sally Middleton (61). They have filed two suits against Morgan Stanley and broker Kate Kearney in the Supreme Court of Victoria.
Court documents say total losses exceeded $5 million across the two super accounts. Ms Middleton’s $1.2 million account was nearly wiped out — leaving about $34,000 — and Ms Sedman’s fund fell from $4.8 million to $950,000 in about two months. Morgan Stanley reportedly reaped more than $1.1 million in fees across the two funds.
The article says the losses came from a series of options and derivatives trades, described by the plaintiffs as aggressive, highly speculative and high‑risk. Much of the activity was in options tied to mining stocks.
The plaintiffs allege misleading and deceptive conduct: that trades were made heavily in options and derivatives against instructions, primarily to generate fees and to conceal losses. They also claim Morgan Stanley failed to adequately advise the super fund trustee about the nature and risk of these derivatives, did not stop increasingly aggressive trading despite risk‑management flags, and withheld complete trading records.
According to the article, Kate Kearney and Morgan Stanley could not be reached for comment.
The article quotes trader David Waterhouse saying betting an individual's retirement savings on the options market is "an act of insanity," and that only about 1% of the population have the knowledge and risk appetite to trade options effectively. The piece emphasises that options trading is high‑risk and not suitable as a general retirement strategy for most people.
The writs state only a "broad estimate" of loss and damage can be provided because Morgan Stanley has refused to supply a complete record of trading. That lack of full trading records is a hurdle in precisely quantifying the plaintiffs’ losses, according to their claims.
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