The State of California is suing Morgan Stanley (MS) for allegedly selling bad residential mortgaged backed securities. According to lawmakers, the firm sold residential mortgage-backed securities as risky loans to subprime lenders while downplaying or hiding the risks and at times encouraging credit raters to bestow the securities with high ratings that were not warranted. Because of these RMBS sales, contends the state, the California Public Employees’ Retirement System (CALPERS) and California State Teachers Retirement System (CalSTRS) sustained devastating losses.
California claims that the firm violated the state’s False Claims Act and securities laws. A significant part of the case challenges Morgan Stanley’s behavior when marketing the Cheyne SIV, which was a structured investment vehicle that failed nine years ago. State Attorney General Kamala Harris is seeking $700M from the firm, as well as over $600M in damages.
Meantime, Morgan Stanley has argued that the case is meritless. It contends that the RMBSs were sold and marketed to institutional investors who were sophisticated enough to understand the investments. They claim that the RBMBs performed in a manner that was in line with the sector to which it belonged.
It was just recently that Moody’s Corp. reached an agreement with CalPERS to pay the California pension fund $130M to resolve allegations that the credit rating agency may have acted negligently by giving high ratings to toxic investments. CalPERS contended that its purchase of the investments cost it hundreds of millions of dollars.
The pension fund sued Moody’s, Fitch, and Standard & Poor’s in 2009 because they gave AAA ratings to bonds that were backed by subprime mortgages. An AAA rating typically implies that the securities are very low risks.
CalPERS believes that it lost up to $1 billion when it put $1.3B into these bonds in 2006. Last year, it reached a $125M settlement with S & P.
At The SSEK Partners Group, our institutional investor fraud law firm helps clients to recover their residential mortgage-backed securities fraud losses. Contact one of our securities attorneys today.
California sues Morgan Stanley over mortgage losses, Yahoo/Reuters, April 1, 2016
Moody’s to Pay Calpers $130 Million to Settle Lawsuit, Wall Street Journal, March 9, 2016