California Sues Morgan Stanley, Alleges ‘Culture Of Greed And Deception’

SAN FRANCISCO (CBS SF) — California’s public pension funds, and the public employees whose retirement depends on it, suffered major losses due to misrepresentations made by investment banking firm Morgan Stanley, according to a lawsuit filed on behalf of the state on Friday.

Morgan Stanley officials have stated that they believe the lawsuit lacks merit.

Public employees in California, including peace officers, firefighters, teachers, and other public servants, suffered major losses as a result of Morgan Stanley’s residential mortgage-backed securities, in which high-risk home loans were purchased from subprime lenders, bundled together and sold for billions of dollars to investors, according to the complaint filed in San Francisco Superior Court.

“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,” California Attorney General Kamala Harris said in a statement released Friday.

These misrepresentations, Harris said, contributed to the global financial crisis and to major losses by investors in California.

In a statement to CBS San Francisco on Friday, Morgan Stanley states:

“We do not believe this case has merit and intend to defend it vigorously. 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 this case elected not to pursue its own lawsuit against the firm.’’

Morgan Stanley, the complaint states, misrepresented the quality of the loans in the investment packages and failed to disclose that many of the mortgages were worth more than the underlying properties and failed to disclose the number of delinquent loans to investors.

Morgan Stanley allegedly violated the False Claims Act, California Securities Law, Unfair Competition Law and practiced false advertising, among other allegations, from 2004 to 2007, when it sold investors high-risk securities without disclosing those risks, according to the complaint.

In California, public employees were hit hard by the financial crisis. The California Attorney General’s Office said in a statement Friday:

“The California Public Employees Retirement System (CalPERS) and the California State Teachers Retirement System (CalSTRS) – two of the nation’s largest institutional investors – lost hundred of millions of dollars on these Morgan Stanley investments. CalPERS provides retirement security and health plans to more than 1.6 million California firefighters, peace officers, and other public employees. CalSTRS provides retirement, disability, and survivor benefits for over 850,000 of California’s pre-kindergarten through community college educators and their families.”

CalPERS, when asked to comment on the lawsuit against Morgan Stanley on Friday, told CBS San Francisco:

“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.”

Attorney General Harris’ California Mortgage Fraud Strike Force, created in 2011, has conducted a multi-year investigation into misconduct in the mortgage industry and has so far recovered over $900 million for California’s public pension funds in settlements.

Harris reached a $300 million settlement with Bank of America in August 2014, a nearly $200 million settlement in July 2014 with Citigroup Inc. and a $300 million settlement with J.P. Morgan Chase in November 2013, as well as $210 million in damages from the credit rating agency Standard & Poor’s in February 2015.

By Hannah Albarazi – Follow her on Twitter: @hannahalbarazi.

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