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California Sues Morgan Stanley Over Unsuitable Mortgage Debt

By Erwin J. Shustak, Esq.  of Shustak Reynolds & Partners, P.C. posted on Monday, April 4, 2016.

On Friday, the state of California sued Morgan Stanley, accusing the bank of hiding the risks of complex mortgage debt and other securities it sold, causing big losses for California’s  public pension funds, including CalPERS and CalSTRS.

California state attorney general, Kamala Harris,  said Morgan Stanley concealed or downplayed the risks of toxic residential mortgage-backed securities and "structured investment vehicles" it marketed from 2004 to 2007, often  encouraging credit rating agencies to award unjustifiably high ratings to mortgage backed securities that Morgan Stanley knew were not worthy of those artificially high credit ratings.

Ms. Harris said Morgan Stanley’s  conduct reflected "a culture of greed and deception" that fueled the 2008 financial crisis and caused the California Public Employees' Retirement System and California State Teachers Retirement System to lose hundreds of millions of dollars.

California accused Morgan Stanley of violating the state's False Claims Act and various state securities laws. It seeks a variety of damages plus civil fines. The lawsuit was filed in the state superior court in San Francisco.  CalPERS had previously recovered hundreds of millions of dollars in settlements with agencies such as McGraw Hill Financial Inc's Standard & Poor's and Moody's Corp's Moody's Investors Service over alleged inflated ratings.

"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 said. "It is also worth noting that the alleged victim in this case elected not to pursue its own lawsuit against the firm."

The case is California v. Morgan Stanley et al, Superior Court of California, San Francisco County, No. CGC16-551238.  In response to the suit, Morgan Stanley, of course, issued a statement that the case “has no merit”.  Time will tell on that point.

Shustak Reynolds & Partners, P.C.  focuses its practice on the securities industry and matters affecting broker-dealers, registered representatives and the financial services sector. For more information, contact Erwin J. Shustak, managing partner, at [email protected], or call 800.496.5900 for a free consultation.

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