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Settlement resolves allegations the company misled investors including CalPERS and CalSTRS
SACRAMENTO - Attorney General Xavier Becerra today announced a $150 million settlement with Morgan Stanley, an American multinational investment bank, for misleading investors including California’s teachers and public employees. The settlement resolves claims that the company concealed the high risk of mortgage-backed securities sold to the California Public Employees’ Retirement System (CalPERS) and the California State Teachers Retirement System (CalSTRS) from 2003 to 2007. Morgan Stanley’s scheme resulted in millions in losses to CalPERS and CalSTRS.
“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 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.”
Mortgage-backed securities are complex investments that bundle together thousands of mortgage loans of potentially varying quality, where the investor typically relies on assurances that the loans have been carefully screened for risk.
An investigation and subsequent multi-year litigation by the Attorney General's Office found that the descriptions of these mortgage-backed securities to investors 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.
The settlement resolves allegations that Morgan Stanley violated California’s False Claims Act, the Corporate Security Law, and the False Advertising Law. Morgan Stanley will pay $150 million. Of those settlement proceeds, CalPERS will recover $122 million in damages and CalSTRS will recover $8 million. The remaining $20 million of the settlement funds will go to the Office of the Attorney General to recover the costs of this investigation and lawsuit, and to help with future investigations and prosecutions of false claims to the state.
The settlement with Morgan Stanley is the latest action by the California Department of Justice to recover losses suffered during the financial crisis and to hold accountable the institutions that contributed to it.
A copy of the settlement is available here.