Morgan Stanley yesterday became the latest financial services group to fall victim to a rogue trader as it admitted that it had suspended a credit trader in London for trying to hide losses of about $120 million (£61.3 million).

America’s second-biggest securities firm said that the Financial Services Authority was conducting a full investigation into the conduct of an unnamed employee - understood to be London-based Matt Piper – after Morgan Stanley discovered in May what it called a “$120 million negative adjustment to marks previously taken in a trader’s book that did not comply with the firm’s policies”.

The markdown is thought to relate to short-term trading in credit index options that may date back as far as last year. The trades are believed be in CDX indices, complex derivatives used to hedge risk on credit investments such as bonds. Morgan Stanley declined to comment on the identity of the rogue trader.

The presence of a rogue trader emerged as Morgan Stanley reported a 60 per cent decline in its second-quarter profits, dragged down by a $955 million loss on its portfolio of mortgage-related investments and loans to finance private equity buy-outs. The group declared net income of $1.03 billion in the three months to June, down from $2.58 billion a year earlier but slightly above expectations.

The decline in profits came despite a one-off gain of nearly $1.5 billion from the sale of its Spanish wealth-management business and a secondary offering of shares in MSCI Barra, a provider of data for hedge funds and other indices in which Morgan Stanley is the majority shareholder.

Morgan Stanley’s figures were also pulled down by $245 million in costs related to 3,000 job cuts since October and by poor results in its trading and investment banking, which includes underwriting and merger advice.

Peter Kenny, managing director at Knight Equity Markets, an asset manager in New Jersey, said: “I don’t think the Morgan Stanley numbers were bad news at all. The results are mundane, but it’s a welcome mundane. There didn’t appear to be anything shocking in there at first look. We’re only seeing a small decline in the shares – we’ve seen a lot worse in the past few months.”

Morgan Stanley’s net revenues, or total revenue minus interest, fell by 38 per cent, from $11.5 billion in last year’s second quarter, to $6.5 billion this year. Colm Kelleher, the group’s chief financial officer, said: “This has been an unusually stressful quarter.”

John Mack, the group chief executive, said: “Difficult market conditions and lower levels of client activity impacted our results, particularly in fixed income and asset management . . . However, Morgan Stanley’s diversified business mix benefited the firm, with solid results in wealth management, prime brokerage [services to hedge funds], equity derivatives and our world-class international franchise.”

Morgan Stanley’s shares closed up 10 cents at $40.69, having fallen earlier as investors worried about the outlook for the underlying business in a tough market, despite the results being slightly ahead of expectations.

The group’s institutional securities business, which includes capital markets and investment banking, reported a 77 per cent decline in profits to $679 million. Revenues in the global wealth management unit rose by 48 per cent, with profits



nearly quadrupled at $989 million, as Morgan Stanley benefited from a $748 million gain from the sale of its Spanish unit. With that sale stripped out, the division’s revenue rose by 4 per cent for the period, to $1.7 billion. The asset management division reported a $227 million loss as revenues fell 68 per cent to $488 million.

Morgan Stanley reported its figures a day after Goldman Sachs cheered the markets with an 11 per cent fall in its second-quarter profit, better than expected. Last week, Lehman Brothers kicked off the second-quarter reporting season among financial groups by unveiling a much larger than expected $2.8 billion loss.

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