Morgan Stanley sued for $750 million by private equity firms claiming fraud

By Greg Farrell

Morgan Stanley was sued for at least $750 million by private equity firms who claim they were defrauded in a deal to invest in a credit agreement for a luxury high-speed rail line.
 

Certares Management LLC and Knighthead Capital Management LLC filed suit Monday in New York state court, alleging Morgan Stanley unlawfully restructured the deal by which they invested in a loan to Miami-based Brightline Holdings, a Fortress Investment Group-backed company currently developing a Los Angeles-Las Vegas rail line. Brightline is also a defendant in the suit.

Certares and Knighthead claim that, in late 2022 and early 2023, Morgan Stanley convinced them to invest around $280 million in the loan by highlighting a “make-whole” provision that would guarantee them a certain amount based on future interest if the loan were repaid early. They claim Morgan Stanley misrepresented and concealed terms of the deal that were used to ratify a preferred-share issue by a Brightline subsidiary. 

 

Morgan Stanley said in a statement, “The Firm does not believe the claims have merit and will defend itself vigorously.” Brightline didn’t respond to a request for comment.

According to the suit, Certares and Knighthead invested in the Brightline loan through their jointly managed CK Opportunities Fund, which was launched during the pandemic to focus on distressed assets in the travel and tourism industry. 

‘Undetected for Month’
 

The firms claim Morgan Stanley went out of its way to hide revisions to the original credit agreement allowing the share issue, even attaching an earlier CK signature page to avoid showing them the amendments. 

“Given Morgan Stanley’s concealment,” the suit claims, the language “went undetected for months.”

The issue should have triggered the deal’s prepayment make-whole provisions, the firms claim. They are asking for an order requiring Brightline to prepay the loan and make the make-whole payments.

Brightline describes itself as the only privately owned and operated intercity railroad in the US. It currently operates between Miami and West Palm Beach and is set to extend service to Orlando on Friday. The company hopes to break ground later this year on its West Coast service, which it claims will take riders from Southern California to Las Vegas in just over two hours at 186 miles per hour.

According to the suit, Morgan Stanley was motivated to defraud Certares and Knighthead because it wanted to “position itself for future lucrative investment-banking business with Brightline Holdings and its private equity owners at Fortress, including through handling municipal debt transactions for Brightline Holdings which could generate sizable fees for Morgan Stanley.”

Certares also claims it has faced retaliation from Morgan Stanley for objecting to the bank’s actions. According to the suit, Morgan Stanley last month declined to participate in another, unrelated financing deal with Certares because of the Brightline dispute.

“This kind of retaliation is unfair and unbecoming of a global financial institution,” the plaintiffs state in the suit.

The case is CK Opportunities Fund v. Morgan Stanley, New York State Supreme Court, New York County (Manhattan).