Morgan Stanley sued for $750 million by lenders to rail line, who claim fraud

NEW YORK (Reuters) – Morgan Stanley was sued on Monday for at least $750 million by private equity firms that claimed they were defrauded in an investment with a high-speed rail company.

In a complaint filed in a New York state court in Manhattan, affiliates of Certares Management and Knighthead Capital Management accused Morgan Stanley of breach of contract and fraud for unlawfully restructuring a transaction in which they had invested in a loan to Brightline Holdings.

Brightline, backed by private equity firm Fortress Investment Group and also a defendant, operates a rail system in Florida and is developing a rail line between Los Angeles and Las Vegas.

The plaintiffs said Morgan Stanley convinced them to invest about $281 million, but hid details of a Brightline preferred share transaction that should have required the loan be prepaid at a “make-whole” amount they estimated at $750 million.

Morgan Stanley was also accused of having swapped out one document with the signature of a Certares affiliate, to make it seem like the affiliate had read and agreed to the preferred share transaction.

The plaintiffs said Morgan Stanley’s actions were intended to position it for “lucrative investment-banking business” from Brightline and Fortress, including municipal bond transactions that could generate “sizeable” fees.

In a statement, Morgan Stanley said “the firm does not believe the claims have merit and will defend itself vigorously.”

Brightline did not immediately respond to a request for comment.

The case is CK Opportunities Fund I LP et al v Morgan Stanley Senior Funding Inc et al, New York State Supreme Court, New York County.