Morgan Stanley 2010 Annual Report Download - page 213

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
among other matters, accounting and operational matters, certain of which may result in adverse judgments,
settlements, fines, penalties, injunctions or other relief.
The Company contests liability and/or the amount of damages as appropriate in each pending matter. Where
available information indicates that it is probable a liability had been incurred at the date of the consolidated
financial statements and the Company can reasonably estimate the amount of that loss, the Company accrues the
estimated loss by a charge to income. In many proceedings, however, it is inherently difficult to determine
whether any loss is probable or even possible or to estimate the amount of any loss. In addition, even where loss
is possible or an exposure to loss exists in excess of the liability already accrued with respect to a previously
recognized loss contingency, it is not always possible to reasonably estimate the size of the possible loss or range
of loss.
For certain legal proceedings, the Company cannot reasonably estimate such losses, particularly for proceedings
that are in their early stages of development or where plaintiffs seek substantial or indeterminate damages.
Numerous issues may need to be resolved, including through potentially lengthy discovery and determination of
important factual matters, and by addressing novel or unsettled legal questions relevant to the proceedings in
question, before a loss or additional loss or range of loss or additional loss can be reasonably estimated for any
proceeding.
For certain other legal proceedings, the Company can estimate possible losses, additional losses, ranges of loss or
ranges of additional loss in excess of amounts accrued, but does not believe, based on current knowledge and
after consultation with counsel, that such losses will have a material adverse effect on the Company’s
consolidated financial statements as a whole, other than the matters referred to in the next two paragraphs.
On September 25, 2009, the Company was named as a defendant in a lawsuit styled Citibank, N.A. v. Morgan
Stanley & Co. International, PLC, which is pending in the United States District Court for the Southern District
of New York (“SDNY”). The lawsuit relates to a credit default swap referencing the Capmark VI CDO
(“Capmark”), which was structured by Citibank, N.A. (“Citi N.A.”). At issue is whether, as part of the swap
agreement, Citi N.A. was obligated to obtain the Company’s prior written consent before it exercised a right to
liquidate Capmark upon the occurrence of certain contractually-defined credit events. Citi N.A. is seeking
approximately $245 million in compensatory damages plus interest and costs. On May 13, 2010, the court
granted Citi N.A.’s motion for judgment on the pleadings on its claim for breach of contract. On October 8, 2010,
the court issued an order denying Citi N.A.’s motion for judgment on the pleadings as to the Company’s
counterclaim for reformation and granting Citi N.A.’s motion for judgment on the pleadings as to the Company’s
counterclaim for estoppel. The Company moved for summary judgment on December 17, 2010. Citi N.A.
opposed the Company’s motion and cross moved for summary judgment on January 21, 2011. Based on
currently available information, the Company believes it is reasonably possible it could incur a loss of
approximately $245 million.
On January 16, 2009, the Company was named as a defendant in an interpleader lawsuit styled U.S. Bank, N.A. v.
Barclays Bank PLC and Morgan Stanley Capital Services Inc., which is pending in the SDNY. The lawsuit
relates to credit default swaps between the Company and Tourmaline CDO I LTD (“Tourmaline”), in which
Barclays Bank PLC (“Barclays”) is the holder of the most senior and controlling class of notes. At issue is
whether, pursuant to the terms of the swap agreements, the Company was required to post collateral to
Tourmaline, or take any other action, after the Company’s credit ratings were downgraded in 2008 by certain
ratings agencies. The Company and Barclays have a dispute regarding whether the Company breached any
obligations under the swap agreements and, if so, whether any such breaches were cured. The trustee for
Tourmaline, interpleader plaintiff U.S. Bank, N.A., has refrained from making any further distribution of
207