Morgan Stanley has agreed to a $150 million settlement to resolve claims that it misrepresented the poor-quality of pre-crisis mortgage bonds and cost California teachers and public employees millions of dollars, the California Attorney General announced Thursday.
The charges claimed that Morgan Stanley concealed the high-risk quality of the mortgage-backed securities it sold to the California Public Employees’ Retirement System and the California State Teachers Retirement System from 2003 to 2007.
The Attorney General’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 concluded that the bank was aware of the misrepresentation but did not remove the poor-quality loans from the investments, because of concerns that such an admission would be a “relationship killer” with the companies making the risky loans.
Morgan Stanley also allegedly used exaggerated appraisals that overstated the value of the properties securing the loans, and knowingly presented incorrect data concerning owner occupancy and the purpose of the loans.
Additionally, the charges allege that Morgan Stanley decided to exclude some loans from mortgage bonds because they were too risky, but then added them back in later, allegedly prompting a Morgan Stanley employee to tell some of his co-workers that someone “could probably retire by shorting these upcoming deals,” and “someone needs to benefit from this mess.”
But instead, Morgan Stanley found itself in major trouble with the state of California, facing changes for violating California’s False Claims Act, the Corporate Security Law and the False Advertising Law.
The $150 million will settle these charges, with CalPERs receiving $122 million and CalSTRS taking $8 million of the settlement. The remaining $20 million will cover the costs of the AG’s investigation and fund future investigations of false claims, the AG’s office said.
“Morgan Stanley lied about the risk of its products and put profits over teachers and public employees who relied on its advice,” said Attorney General Xavier Becerra. “Today’s settlement holds Morgan Stanley accountable for misleading Californians who were unfairly blindsided. Our office has recovered over $1 billion from cheaters on Wall Street since the financial crisis. Our work isn’t over.”