The California attorney general’s office sued Morgan Stanley on behalf of CalPERS and CalSTRS, saying both pension funds lost hundreds of millions of dollars after the financial firm misrepresented the safety of subprime mortgage-backed securities and structured investment vehicles.
The lawsuit, filed in state court in San Francisco on April 1, said Morgan Stanley sold the investments to institutional investors but never disclosed it had concerns about riskiness of the debt.
Both the $290.7 billion California Public Employees’ Retirement System, Sacramento, and the $178.7 billion California State Teachers’ Retirement System, West Sacramento, lost billions of dollars overall buying subprime debt from a variety of financial institutions.
Among the investments cited in the lawsuit is the purchase by CalPERS of $403 million in MBS and SIV senior securities that were marketed to the pension plan by Morgan Stanley back in 2006. The suit says Morgan Stanley was acting as a placement agent and structured the investment for Cheyne Finance, which was part of British hedge fund Cheyne Capital Management.
The investment collapsed, the lawsuit said, noting that CalPERS “suffered massive losses on its purchase of Cheyne senior notes.” The suit says that the Cheyne SIV assets were sold for roughly 44 cents on the dollar.
Morgan Stanley’s marketing materials had described the securities as the equivalent of a U.S. Treasury note, but with higher interest rates, the lawsuit notes.
A source with the attorney general’s office said CalPERS sustained most of the losses, which were in excess of $200 million.
Morgan Stanley spokesman Mark Lake in a statement said: “We do not believe this case has merit and intend to defend it vigorously.”
CalSTRS spokesman Ricardo Duran referred request for comment to the attorney general’s office, which was unavailable at press time.
CalPERS officials were unavailable immediately for comment.