Morgan Stanley will pay $275 million to settle charges brought by the Securities and Exchange Commission alleging inadequate investor disclosure in two residential mortgage-backed securities offerings in 2007.
Michael Osnato, chief of the SEC enforcement division’s complex financial instruments unit, said that Morgan Stanley “understated the number of delinquent loans behind these securitizations during a critical juncture of the financial crisis and denied investors the full extent of the facts necessary to make informed investment decisions.”
Without admitting or denying the charges, Morgan Stanley agreed to pay $275 million into a fund for the institutional investors harmed by the faulty disclosures. The amount is for $161 million of incurred losses, $18 million in interest and a $96 million penalty, all of which will go to the investors after the SEC appoints a fund administrator.
SEC investigators found that Morgan Stanley misrepresented the current or historical delinquency status of mortgage loans underlying two subprime RMBS securitizations that were collateralized by mortgage loans with an aggregate principal value balance of more than $2.5 billion.
The firm acquired most of the loans from New Century Mortgage Corp. after it filed for bankruptcy in April 2007. Morgan Stanley structured and sold the two transactions through three sponsor, depositor and underwriter entities, and “knew or should have known” that the delinquency disclosures were materially inaccurate, the SEC order said. They were the company’s last subprime RMBS offerings, SEC officials said.
Morgan Stanley spokesman Mark Lake said the company, which disclosed the preliminary settlement in an earlier 10-K filing, set aside the money for the fund. “We’re pleased to have settled the matter,” Mr. Lake said in an interview.