Morgan Stanley dragged into Brazil bank fight: report

SAO PAULO (Reuters) - Brazilian authorities want investment banking giant Morgan Stanley to return about 113 million reais ($54 million) associated with a stock sale by shareholders of troubled lender Banco Cruzeiro do Sul, which was seized by the central bank this month, Folha de S.Paulo newspaper reported Sunday.

The share sale occurred in May, just two weeks before the central bank seized Cruzeiro do Sul and placed the mid-sized bank under the administration of banking insurance deposit fund FGC for 180 days after uncovering accounting irregularities.

Morgan Stanley was managing the Brazilian investment fund that acquired the shares, Folha said.

The FGC believes the transaction could have permitted Cruzeiro's previous owners to "subtract part of (the bank's) net worth," Folha reported, citing a letter sent by the deposit fund last week to Morgan Stanley and the central bank.

As a result, the FGC wants Morgan Stanley to return the money collected from the stock sale to Cruzeiro, Folha said. The funds would be used to pay Cruzeiro's creditors, it said.

A spokesman for Brazil's central bank did not respond to a request for a comment. E-mails sent to the FGC and Morgan Stanley were also not immediately answered.

The Cruzeiro incident was the third time in the last year and a half that Brazil's government has intervened in a bank, a sign that years of rapid growth have resulted in deteriorating funding and liquidity conditions as well as a relaxation of credit risk and accounting controls among some smaller lenders.

(Reporting by Brian Winter; Editing by Maureen Bavdek)