California Sues Morgan Stanley Over Mortgage Losses

By Christopher Ryu,
Money & Investing Writer
mortgage losses

From 2004 to 2007, Morgan Stanley (NYSE: MS) sold the state of California risky structured investment vehicles and toxic mortgage backed securities that eventually caused major losses to CalPERS and CalSTRS (the state’s public pension funds).

Now California is suing Morgan Stan-ley for downplaying the actual risks associated with the mortgage debts.

The state attorney general, Kamala Harris, said that not only were they concealing the real risks in the mortgage backed securities, but they sometimes got credit rating agencies to give undeserving ratings for the securities.

The banks actions show “a culture of greed and deception” which ultimately spurred the 2008 financial crisis as well as caused the loss of hundreds of millions of dollars in California’s public pension funds.

“Morgan Stanley’s conduct in this case evidenced a culture of greed and deception that helped create a devastating economic crisis and crippled California’s budget,” said Atty. Gen. Kamala Harris on Friday.

Filed in the state superior court in San Francisco, California’s lawsuit accuses Morgan Stanley of violating the False Claims Act as well as numerous other securities laws set by the state.  California aims at a variety of damages and civil fines.

“This lawsuit is necessary in order to hold Morgan Stanley accountable for the destruction it caused to California, our people, and our pension funds,” said Atty. Gen. Harris
The total amount of losses was not reported in this case, but this is not the first lawsuit filed under the same case.

California previously filed a suit, for the same investments, under an estimated combined loss of more than $1 billion, majority from CalPERS.

State Atty. Gen. Harris is looking for $700 million in penalties, plus more than $600 million in damages against Morgan Stanley.

Morgan Stanley believes that the state of California has no merit for the lawsuit.

“The securities at issue were marketed and sold to sophisticated institutional investors and their performance has been consistent with the sector as a whole.  It is also worth noting that the alleged victim in the case elected not to pursue its own lawsuit against the firm.”

Morgan Stanley plans to defend themselves “vigorously”, according to spokesman Mark Lake.

One of the state’s pension funds, CalPERS, recovered hundreds of millions of dollars from settlements with rating agencies like Standard & Poor’s and Moody’s for the exaggerated ratings on some of the securities.

Moody’s Corp paid $130 million to California to settle the allegations on negligent ratings and combined, Standard & Poor’s and Moody’s Corp., paid roughly $255 million.

The California Public Employees Retirement System (CalPERS) is the nation’s largest pension fund, covering more than 1.6 million public employees, including firefighters, police officers and other public employees, as well as retirees.

The California State Teachers Retirement System covers more than 850,000 teachers and was also hit hard by the downplay Morgan Stanley assumed on the mortgage securities being sold to them.

In December 2006, Morgan Stanley acquired Saxon Capital Inc., a residential mortgage lender that was used as the primary tool by Morgan Stanley for dumping bad debt.

“Calpers applauds the Attorney General for her continued efforts to hold financial institutions accountable for their nefarious actions.

We look forward to her success in restoring to Calpers the money that rightfully belongs to our members and employers.” Said Megan White, the spokesperson for the Calpers fund.

The case is People of the State of California v. Morgan Stanley, 16-551238, Superior Court of the State of California, County of San Francisco.

A version of this article appeared in the Tuesday, April 12th print edition.

Contact Christopher at


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