Chinese firm beats Morgan Stanley out of most of its derivatives claim


Morgan Stanley Settles Derivatives Lawsuit with Chinese Company

By Robert Cookson
Financial Times, London
Thursday, January 7, 2010

HONG KONG -- Morgan Stanley has ended a confrontation with a Chinese company over disputed hedging contracts in an out-of-court settlement that may be a model for ending similar disputes involving mainland enterprises.

The Morgan Stanley dispute with China Haisheng Juice Holdings was the most public of many between foreign investment banks and dozens of mainland Chinese companies over lossmaking derivatives deals.

The scale of the losses in the wake of the financial crisis triggered a clampdown on derivatives by regulators in Beijing and criticism of the practices of foreign banks.

The two companies have agreed to end legal proceedings over renminbi-dollar hedges they had been fighting in courts in the UK and China since last April.

Under the settlement, Haisheng will pay Morgan Stanley $7 million, far less than the $26 million the investment bank had been fighting for in London's High Court after the Chinese company ceased payments on the hedges.

Haisheng will dismiss its legal proceedings in Xian, Shaanxi province, where it was counter-suing Morgan Stanley for allegedly mis-selling the contracts.

"The parties have resolved the dispute between them to their mutual satisfaction," Morgan Stanley said.

Haisheng failed to respond to a request for comment.

A legal battle in China would have subjected Morgan Stanley to financial and political risks, lawyers said, making the settlement the most attractive option.

But the agreement could encourage other Chinese companies to take legal action against foreign banks at home as a tactic to escape lossmaking contracts, lawyers warned.

Global banks are reluctant to fight cases in China, where judges are appointed by local communist leaders who often control large companies in their areas.

The leading foreign investor in Haisheng is Goldman Sachs, Morgan Stanley's competitor. Goldman's private equity arm holds 20 per cent of Haisheng's Hong Kong-listed shares.

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