Morgan Stanley To Settle Mortgage-Backed Securities Claims For $1.25B

Morgan Stanley To Settle Mortgage-Backed Securities Claims For $1.25B

NEW YORK — (Mealey’s) Morgan Stanley will pay $1.25 billion to settle claims that it, certain of its subsidiaries and others misrepresented the investment quality in more than $10.58 billion in certificates in connection with 33 securitizations of residential mortgage-backed securities Morgan Stanley sold to Fannie Mae and Freddie Mac, according to Securities and Exchange Commission documents filed Feb. 4 (Federal Housing Finance Agency, as Conservator for Fannie Mae and Freddie Mac, v. Morgan Stanley, et al., No. No. 11-6739, S.D. N.Y.). 

According to the SEC Form 8-K, Morgan Stanley and the Federal Housing Finance Agency (FHFA), as conservator for Fannie Mae and Freddie Mac, agreed in principle to settle the claims, which are part of an action filed in the U.S. District Court for the Southern District of New York. 

Under the terms of the settlement, which are subject to court approval, Morgan Stanley “will record an addition to legal reserves of $150 million, which will have the impact of reducing income from continuing operations applicable to Morgan Stanley (both reported and excluding DVA [debt valuation adjudgment]) by $97 million (after tax) and earnings per diluted share amounts from continuing operations (both reported and excluding DVA) by $0.05 for both the fourth quarter and fiscal year ended December 31, 2013 versus the amounts previously reported in the Company’s earnings release dated January 17, 2014.” 

The FHFA filed its suit in the District Court, naming Morgan Stanley and a number of its subsidiaries, as well as several underwriters of the securitizations and others as defendants. 

Claims Made 

The FHFA alleged that the defendants violated Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 by misrepresenting the investment quality of the securities in the offering documents for the certificates. 

Additional claims for primary violations of the Virginia Securities Act and the District of Columbia Securities Act, controlling person liability claims under the Virginia Securities Act and the District of Columbia Securities Act, common-law fraud and aiding and abetting were also made. 

Morgan Stanley’s Form 8-K is available online at www.sec.gov/Archives/edgar/data/895421/000095010314000764/dp43592_8k.htm

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