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

The disputed deal involved a loan to Miami-based Brightline Holdings, which is developing a high-speed rail line between Los Angeles and Las Vegas.

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

Certares Management and Knighthead Capital Management filed suit Monday in New York state court, alleging that Morgan Stanley unlawfully restructured the deal in 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.

That 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.

Morgan Stanley said in a statement, “The Firm does not believe the claims have merit and will defend itself vigorously.”

Brightline didn’t immediately respond to a request for comment.

According to the suit, the bank 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).