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MORGAN STANLEY SETTLES
RMBS CLAIMS
Morgan Stanley agreed to pay back $275
million to investors whom the Securities and
Exchange Commission say were misled by a
pair of mortgage bonds the company marketed
during the financial crisis.
According to the SEC, three entities of Mor-
gan Stanley–Morgan Stanley & Co. LLC, Mor-
gan Stanley ABS Capital I Inc., and Morgan
Stanley Mortgage Capital Holdings LLC–mis-
represented their delinquency status regarding
mortgage loans in the subprime market in 2007.
Federal regulations require the disclosure of
delinquency information for the mortgage loans
serving as collateral.
According to the SEC, Morgan Stanley had
a chart showing that approximately 17 percent of
its HE7 loans (which guarantee such protec-
tions as full replacement costs in the event that
a homeowner needs to rebuild a home back to
its pre-loss condition) had been delinquent at
some point. Morgan Stanley also reportedly
used information about payments made after
the cut-off date to label the loans as delinquent
as of the cut-off date. By using the later payment
data, Morgan Stanley reported 46 fewer loans as
delinquent, leading the firm to disclose that less
than 1 percent of the loans were delinquent, the
SEC reported.
"e delinquency status of mortgage loans
in an RMBS securitization is vital information
to investors, because those loans are the primary
source of funds by which they potentially can
recover and profit from their investments," said
Michael Osnato, chief of the SEC Enforcement
Division's Complex Financial Instruments Unit.
"Morgan Stanley understated the number of de-
linquent loans behind these securitizations during
a critical juncture of the financial crisis and denied
investors the full extent of the facts necessary to
make informed investment decisions."
e case involving Morgan Stanley comes
less than two weeks after Citigroup's $7 billion
settlement with the federal government over
similar accusations of misleading mortgage cus-
tomers during the crisis. Morgan Stanley itself
has neither admitted nor denied wrongdoing.
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