Special Report: Investors Chasing Morgan's Biggs After $25 Million Ruble Loss

It must have been his sunny disposition that won them over.

Swiss financial giant UBS says big-time Wall Street strategist Barton Biggs, known for his less-than-optimistic view of the markets, personally persuaded the company to invest a client's assets in an offshore fund that blew $25 million on an ill-fated bet on Russian securities.

Now, UBS International Trustees is suing Biggs and his employer, Morgan Stanley Dean Witter (MWD).

According to the suit, the Eugenia Trust, a UBS client, invested $25 million in 1997 in a Morgan Stanley emerging-markets hedge fund based in the Cayman Islands. An amended complaint filed in late December alleges that Morgan Stanley and Biggs falsely claimed that investments from the hedge fund would be diversified when, in fact, more than 80% of the fund was placed in Russian securities. The suit was filed in U.S. District Court for the Southern District of New York.

Morgan Stanley declined to comment on the suit, aside from saying it hasn't filed its response, according to Ray O'Rourke, a Morgan Stanley managing director. Biggs didn't respond to a request for an interview.

Bigg Sales Pitch

As it pitched the Morgan Stanley Emerging Markets Debt Opportunity fund to prospects, the firm assured UBS that the fund was overseen by Biggs, the suit alleges. Given Biggs' stature on Wall Street -- think big -- that pitch probably had plenty of weight.

Biggs has become one of Wall Street's highest-profile bears over the past five years, but in 1997 and 1998 the Morgan Stanley hedge fund he helped oversee invested heavily in Russian Treasury notes backed by the ruble. So, when the Russian currency market collapsed in August 1998, so too did the fund, which cost Morgan Stanley about $300 million when it was forced to step in and meet margin calls on the fund. Two Morgan Stanley executives involved with managing the fund departed the company shortly afterward, but Biggs remained.

UBS and Eugenia are demanding not only repayment of the $25 million in lost investments in the hedge fund, but also an additional $250 million in punitive damages.

The suit charges that when the emerging market investments began losing money in 1997, Biggs personally urged Eugenia, a Channel Islands trust set up by Hans-Werner Hector, one of the founders of German software giant SAP (SAP), to remain in the investments and in the Morgan Stanley fund.

Even as late as Aug. 13, 1998, as wealthy financier George Soros predicted a meltdown of Russian financial markets in a letter published in the Financial Times, the Morgan Stanley hedge fund nonetheless remained invested in Russian T-bills, known as GKOs, according to the lawsuit.

When the Russian debt markets actually were collapsing a day later, Morgan Stanley official Francine Bovich made a 7 p.m. phone call to urge the Eugenia Trust to invest at least $25 million more in the emerging market fund, according to the suit.

Bustle in the Hedge Row

The suit says Bovich, a Morgan Stanley Asset Management managing director, told Eugenia officials that Biggs planned to invest $10 million of his own money in the fund. But the suit alleges that Biggs actually didn't plan such an investment and that instead the fund needed additional cash to meet increasing margin calls, a fact it didn't disclose to Eugenia.

"Bovich really called Eugenia to raise cash to meet margin calls," the suit contends. "During the call, she knew that further investment in the fund was in fact not in [Eugenia's] best interest."

Eugenia decided not to invest the additional money in the fund, according to Paul Summit of Boston law firm Sullivan & Worcester, which is representing the plaintiffs.

After the Russian market collapsed, Morgan Stanley convinced Eugenia to sell all of its remaining shares in the emerging market fund for $1.9 million to a Morgan Stanley affiliate, MS LDC Ltd.

That meant, according to the lawsuit, an almost complete loss for Eugenia while giving the Morgan Stanley unit an opportunity to bottom fish and profit from even a mild rebound.

Their next conversation could be in a Manhattan courtroom with $25 million, and possibly Biggs' reputation, on the line.

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