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Morgan Stanley Faces $750 Million Lawsuit Over Alleged Fraudulent Practices in Rail Line Deal

Morgan Stanley is facing a $750 million lawsuit filed by Certares Management LLC and Knighthead Capital Management LLC, two private equity firms.

The firms are accusing the bank of fraudulent practices related to a credit agreement investment for a luxury high-speed rail line.

The dispute centers on an investment deal for Miami-based Brightline Holdings, which is backed by Fortress Investment Group. Brightline is developing a rail line project between Los Angeles and Las Vegas.

According to allegations made in the New York State Court on Monday, Morgan Stanley unlawfully restructured the deal. The plaintiffs claim that Morgan Stanley coaxed them into investing around $280 million in the loan during late 2022 and early 2023.

The investment was reportedly underpinned by a “make-whole” clause, promising the investors a guaranteed amount based on future interest if the loan was prepaid.

However, Certares and Knighthead argue that Morgan Stanley misrepresented and concealed certain terms of the deal.

They allege these hidden terms were later used to validate a preferred-share issue by a subsidiary of Brightline. The plaintiffs maintain that this issue should have triggered the deal’s prepayment make-whole provisions. As such, they are now demanding that Brightline prepay the loan and fulfill the make-whole payments.

The lawsuit suggests that Morgan Stanley’s alleged fraudulent conduct was motivated by its desire to secure future lucrative investment-banking business with Brightline Holdings and its private equity owners at Fortress. This could potentially include managing municipal bond transactions for Brightline Holdings, thereby generating substantial fees for Morgan Stanley.

Certares also alleges it has faced retaliation from Morgan Stanley due to its objections against the bank’s actions. The suit mentions an instance from last month where Morgan Stanley declined to participate in another unrelated financing deal with Certares, citing the ongoing Brightline dispute.

The case, filed as CK Opportunities Fund v. Morgan Stanley, is currently pending in the New York State Supreme Court, New York County (Manhattan). Brightline Holdings has yet to comment on the issue. Morgan Stanley has expressed its intent to vehemently defend itself and denies the validity of the claims.

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