Yahoo Finance Mike Ashley seals peace deal with Morgan Stanley over ‘snobbery’ claims
The Frasers billionaire Mike Ashley has ended his legal attack on Morgan Stanley over claims “snobbery” was behind a $1bn cash demand that threatened to destabilise his empire.
Frasers and the Wall Street investment bank have agreed a settlement following hearings in February, meaning no judgment will be passed by the High Court. The terms of the settlement are confidential following a trial which would have been costly for both sides.
It marks an anti-climatic ending to Mr Ashley’s pursuit of Morgan Stanley and some of its most senior bankers.
However, as well as being embarrassing for an investment banking business which trades on discretion, the case raised questions over the conduct and policies of one of the world’s most powerful financial institutions which could invite unwelcome attention from financial regulators on both sides of the Atlantic.
Natasha Harrison, managing partner of City law firm Pallas, said: “This case is likely to be of significant interest to them, both in relation to the level of exposure that was permitted to build up, as well as the conduct of the bank towards Frasers itself.”
In closing arguments at the High Court, Frasers claimed that Morgan Stanley’s own witnesses confirmed that its internal risk controls were ineffective.
Morgan Stanley already faces pressure from regulators over its internal processes. In January, the US Securities and Exchange Commission charged the bank and its former US equity syndicate boss with fraud relating to block trades, a way of selling bulk amounts of stock.
Morgan Stanley agreed to pay $249m to settle the federal investigations into deception, fraud and compliance failures within its block trading business.
It has also come under fire from UK gas and electricity regulator Ofgem, which last year fined the bank £5.4m after energy traders discussed business over private WhatsApp messages. It marked the first penalty issued under transparency rules designed to protect consumers against market manipulation and insider trading.
Morgan Stanley’s dispute with Mr Ashley centred on a call for $1bn cash collateral to cover the risk from his trades on the share price of Hugo Boss stock in 2021.
Mr Ashley claimed damages of around £40m over the alleged attempt to force Frasers to abandon its positions in the German luxury fashion house.
Morgan Stanley issued a demand known as a margin call which ultimately required Frasers to deposit extra cash to cover a potential 400pc move in Hugo Boss’s share price.
Mr Ashley, 59, argued the decision was “arbitrary” and the extraordinary cash sum was disproportionate to any risks the bank faced. One of Morgan Stanley’s own expert witnesses said his analysis did not support the bank’s calculations.
The settlement comes after the two sides clashed in a two-and-a-half week trial. Lawyers for Mr Ashley at the time claimed Morgan Stanley’s cash-call was an unlawful abuse of power and motivated by “snobbery” and a personal animus towards the colourful entrepreneur.
Mr Ashley described Morgan Stanley’s margin call in May 2021 as “completely unbelievable”, forcing him to transfer the trades to rival bank HSBC.
He told the High Court: “You might as well have said a nuclear bomb landed in Slough – it couldn’t happen. You’re in total shock.”
However, Mr Ashley’s case was considered as a difficult one to prove because Frasers was not a direct client of Morgan Stanley, which argued it therefore had no liability. The bank calculated and imposed the margin call on Denmark’s Saxo Bank, which contracted with Frasers.
It was through Saxo Bank that Frasers Group sold what are known as call options, contracts which give buyers the right to purchase Hugo Boss stock at a certain price over a certain period. These buyers were effectively betting on the share price rising.
Frasers, which owned Hugo Boss stock, received payments from buyers in return for these options. The Shirebrook-based company regarded the call options as low risk trades, which were backed up by its own stake in Hugo Boss.
Mr Ashley started building Frasers’ position in Hugo Boss in 2019. He believed the German retailer was undervalued and the investment could improve ties with the House of Fraser and Flannels supplier.
However, Frasers claimed 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 lawsuit as contrived and without merit.
The bank denied it acted unfairly and instead argued it had the right to demand protection against movements in Hugo Boss stock.
However, the legal battle raised questions around risk processes at one of the largest investment banks in the world.
Lawyers for Mr Ashley questioned how the Hugo Boss trades were allowed to build up over weeks without being noticed before Morgan Stanley imposed the $1bn margin call. In the weeks leading up to Morgan Stanley’s margin call, Frasers’ bets on Hugo Boss increased from zero to more than €200m (£171m).
Mr Ashley’s lawyers claimed that Morgan Stanley wanted Frasers to abandon its positions because of a “panicked desire to avoid criticism” for missing the trades.
Frasers argued that Morgan Stanley’s “apparent carelessness” was especially embarrassing because it came months after the lender faced $911m (£722m) of losses linked to the collapse of Archegos.
The US bank at the time was seeking to cut exposures and reexamine risky relationships after Archegos, a New York family office, defaulted on margin calls after making losing bets on American media group ViacomCBS.
Morgan Stanley’s risk controls were also scrutinised after claiming that there were no internal policies relevant to the margin call.
Nick Leeson, the “rogue trader” behind the collapse of Barings Bank, claimed that this crucial oversight of the Hugo Boss trades suggested Morgan Stanley was “asleep at the wheel”.
The former derivatives trader previously told The Telegraph that the lawsuit exposes what could be the “worst risk management breakdown” since he triggered the downfall of the UK’s oldest merchant bank.
The former trader, who lost $1.4bn in illegal 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 busy time for Simon Smith, Morgan Stanley’s global co-head of investment banking, who was accused of expressing “personal visceral objection” toward Mr Ashley opening a prime brokerage account at the lender.
Mr Smith is among the Morgan Stanley advisers to Anglo-American, the London-listing mining giant, in its takeover talks with BHP.
Court documents showed that Mr Smith told colleagues that Mr Ashley was a “working-class boy” who would have “zero respect” for the way Morgan Stanley operates.
The dealmaker denied taking a personal dislike to Mr Ashley but admitted he had “reputational and regulatory concerns” about working with him, describing him as “highly litigious”.
The settlement could raise alarm for Frasers shareholders, given that the retail giant would have footed the billionaire’s legal costs so far.
Morgan Stanley told the High Court that Frasers was relying on a “seemingly unlimited” war chest to waste court time.
However, Mr Ashley previously denied claims that he takes “guilty pleasure” from lawsuits and claimed it comes with the territory of being the former owner of Newcastle United football club.
A spokesman for Morgan Stanley said: “Frasers Group plc and Mr Michael Ashley have both withdrawn their claims against Morgan Stanley on terms which do not involve any payment of monies by any party to any other. Frasers, Mr Ashley and Morgan Stanley confirm that the disputes between them are therefore resolved.”
Frasers declined to comment.
