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From Banking and Finance Law Daily, April 26, 2019

Morgan Stanley to pay $150 million for misleading California investors

By Colleen M. Svelnis, J.D.

Morgan Stanley has agreed to pay $150 million in a settlement with the Attorney General’s Office of California for misleading investors, which included the retirement plans of California teachers and public employees, about the risks involved in mortgage-backed securities.

California Attorney General Xavier Becerra announced a settlement agreement between his office and Morgan Stanley to resolve claims that the investment bank concealed the high risk of mortgage-backed securities sold to investors. Morgan Stanley agreed to pay $150 million to the state of California for misleading its investors, from 2003-2007, including the California Public Employees’ Retirement System (CalPERS) and the California State Teachers Retirement System (CalSTRS).

According to a release from Becerra, Morgan Stanley’s actions resulted in millions in losses to CalPERS and CalSTRS. Mortgage-backed securities bundle together thousands of mortgage loans of potentially varying quality. "Morgan Stanley lied about the risk of its products and put profits over teachers and public employees who relied on its advice," said Becerra. The multi-year litigation came after an investigation by the California AG’s office. Becerra stated that his office "found that the descriptions of these mortgage-backed securities to investors failed to accurately disclose the true characteristics of many of the underlying mortgages, and that due diligence to remove poor quality loans from the investments was not adequately performed." Additionally, according to Becerra, Morgan Stanley "was aware of the misrepresentations but failed to correct them."

The settlement agreement ends the litigation, which alleged violations of California’s False Claims Act, its Corporate Security Law, and other state laws. According to the agreement, the full amount of the payment will constitute restitution, and not be considered a fine or a penalty.

Companies: Morgan Stanley & Co. LLC; Morgan Stanley Mortgage Capital Holdings LLC, Morgan Stanley ABS Capital I Inc., Morgan Stanley Capital I Inc.; Saxon Funding Management LLC; Saxon Asset Securities Company

MainStory: TopStory CaliforniaNews EnforcementActions Mortgages SecuritiesDerivatives StateBankingLaws

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