California Settles with Morgan Stanley over Financial Crisis Losses

Recession-era mortgage-backed securities deals creates $150 million settlement for CalPERS, CalSTRS.

The dust is still settling after the suite of mortgage-backed securities fraud cases that backed the 2008 global financial crisis, the legal implications of which are being highlighted again in a recent settlement between Morgan Stanley and the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS).

“The settle resolves claims that [Morgan Stanley] concealed the high risk of mortgage-backed securities sold to CalPERS and CalSTRS from 2003 to 2007,” California Attorney General Xavier Becerra said in a statement.  “Morgan Stanley’s scheme resulted in millions in losses to CalPERS and CalSTRS.”

The 2008 financial epidemic that rocked global markets was heavily influenced by the subprime mortgage crisis, which triggered a widescale decline in housing prices, leading to mortgage delinquencies, foreclosures, and the devaluation of housing-related securities.

Morgan Stanley denied the allegations brought about in the lawsuit “and all claims of wrongdoing,” the settlement reads. Becerra’s office said its investigation found that Morgan Stanley did not accurately describe the mortgage-backed securities to investors or reveal the true characteristics of the underlying mortgages. It also found that the company did not do its part in reviewing the securities in the structured investment vehicles to weed out the poor-quality mortgages before selling them to the pensions.

“Morgan Stanley was aware of the misrepresentations but failed to correct them,” Becerra’s office added.

CalPERS will receive $122 million of the settlement, with CalSTRS getting $8 million. The  remaining $20 million will go to the attorney general’s office to recover the fees associated with its investigation, and to aid the office in future investigations.

“The money rightfully belongs to our members and will be put back into our fund to ensure their long-term retirement security,” Matthew Jacobs, CalPERS’ general counsel, told CIO. “It sends a clear signal to the financial industry that we will spare no effort to hold them accountable for action that harm investors.”

CalSTRS declined to comment. Morgan Stanley and its representative firm, Davis Polk & Wardwell, did not respond to questions by press time.

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