The California attorney general's office announced it has made a $150 million settlement with Morgan Stanley (MS) for misleading investors regarding the risk of mortgage-backed securities, according to a news release Thursday.
The office had filed suit against Morgan Stanley in April 2016 on behalf of the $362 billion California Public Employees' Retirement System, Sacramento, and the $227.8 billion California State Teachers' Retirement System, West Sacramento, 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.
"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 in the news release. "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." Former Attorney General Kamala Harris held office at the time of the original suit.
The news release said the descriptions of Morgan Stanley's MBS investments "failed to accurately disclose the true characteristics of many of the underlying mortgages, and that due diligence to remove poor quality loans from the investments was not adequately performed. Morgan Stanley was aware of the misrepresentations but failed to correct them."
Among the investments cited in the original lawsuit was the purchase by CalPERS of $403 million in MBS and SIV senior securities that were marketed to the pension plan by Morgan Stanley in 2006. The suit said Morgan Stanley was acting as a placement agent for the investment, which was structured for Cheyne Finance, which was part of British hedge fund Cheyne Capital Management. The investment collapsed, and the lawsuit had said that the Cheyne SIV assets were sold for roughly 44 cents on the dollar.
Morgan Stanley in the settlement document continues to deny all wrongdoing, damages and liability. Morgan Stanley spokesman Mark Long had no further comment, but noted in an email that "at this point Morgan Stanley has no further regulatory enforcement matters pending relating to the credit crisis."
CalPERS' general counsel Matthew Jacobs said in an emailed statement: "This money rightfully belongs to our members and will be put back into our fund to work to ensure their long-term retirement security. It sends a clear signal to the financial industry that we will spare no effort to hold them accountable for actions that harm investors.”
A CalSTRS spokeswoman declined comment.