Calling the odds

THE SCANDAL which surfaced last week at Morgan Stanley shows that even the most sophisticated investors can have the wool pulled over their eyes. Various high-rollers, including the Adidas boss Robert Louis-Dreyfus, lost pounds 19m after their investment adviser at Morgan Stanley put them into various unauthorised and highly leveraged derivatives contracts. The details are on page 5.

Morgan Stanley has already compensated the investors, agreed to pay fines of pounds 240,000, and insists it has tightened internal controls in its private finance division. All well and good.

But one worrying aspect of the affair still persists at Morgan Stanley and, as far as I know, every other London-based investment bank which runs discretionary accounts for private clients. This is that the bank continues to act as the counter-party in derivatives transactions conducted on behalf of clients. In other words, it handles both sides of the deal.

The conflict of interest is blatant. It's the equivalent of handing your money over to a bookie, asking him to decide which bets to place with himself and letting him choose the odds. It isn't allowed in Morgan Stanley's home country of the US. It shouldn't be allowed here.