 "Morgan Stanely")
California sued Morgan Stanley over claims it misrepresented "complex investments" sold to the state's employee pension funds, including the type of subprime mortgage-backed securities that led to the global financial crisis.
Attorney General Kamala Harris alleges that Morgan Stanley violated at least three California laws by "concealing or understating the risks of intricate investments involving large numbers of underlying loans and other assets."
Harris accuses the bank of bundling high-risk loans from subprime lenders - some directly funded by Morgan Stanley - and selling them to investors without disclosing its own concerns about the poor quality of the debt.
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"We do not believe this case has merit and intend to defend it vigorously," Mark Lake, a Morgan Stanley spokesman, said in a statement. "The securities at issue were marketed and sold to sophisticated institutional investors and their performance has been consistent with the sector as a whole. It is also worth noting that the alleged victim in this case elected not to pursue its own lawsuit against the firm."
The case against Morgan Stanley is the latest jab in Harris's fight for compensation after the 2008 mortgage crisis crippled the global economy. In 2014, she secured $369 million for the state out of a national $25 billion foreclosures settlement.
According to Harris, Morgan Stanley pooled billions of dollars of debt, including home loans and mortgage-backed securities, from 2004 to 2007 and sold them to investors, including the state's retirement funds. The bank entered the structured investment vehicles market in 2004 serving as "arranger, lead dealer and structurer" to help Cheyne Capital Management issue the SIV notes that included the consolidated debt.
Morgan Stanley misrepresented the quality of the investments in its own offering documents by failing to disclose that the lenders had issued debt exceeding the value of the properties acquired, while some loans were already delinquent, according to the complaint. The document cites a Morgan Stanley employee as stating, "Someone could probably retire by shorting these upcoming deals" and that "someone needs to benefit from this mess."
