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California sues Morgan Stanley over crisis-era mortgage bonds

latimes.com | April 3, 2016

By James Rufus Koren

California Atty. Gen. Kamala Harris has sued investment bank Morgan Stanley over mortgage-backed securities issued in the run-up to the financial crisis, saying the firm misrepresented the riskiness of those investments.

In the suit, filed Friday in San Francisco Superior Court, Harris accuses the bank of making false claims, withholding information from investors and pushing credit rating agencies to downplay the risks of mortgage-backed securities and other investments that later went bad, costing the state's pension funds as well as private investors.

"This lawsuit is necessary in order to hold Morgan Stanley accountable for the destruction it caused to California, our people and our pension funds," Harris said in a statement Friday.

The securities in question were sold between 2004 and 2007. Some included loans from Irvine subprime lender New Century, which went bankrupt in 2007.

Harris is seeking $700 million in penalties against Morgan Stanley, plus damages of more than $600 million, spokeswoman Rachele Huennekens said.

Morgan Stanley spokesman Mark Lake said the company plans to defend itself "vigorously."

"We do not believe this case has merit," he said. "The securities at issue were marketed and sold to sophisticated institutional investors, and their performance has been consistent with the sector as a whole."

The financial crisis is the better part of a decade old, and financial firms already have paid billions in penalties and settlements related to crisis-era securities. Last month, ratings agency Moody's Corp. agreed to pay $130 million to the California Public Employees' Retirement System to settle allegations that the firm negligently rated risky securities as safe.

Still, as Friday's case shows, investors and public officials are still taking banks to court. Late last year, Germany's Commerzbank sued Wells Fargo and other lenders, saying they did not do enough to protect investors from buying shoddy loans.

"There is still new litigation coming out of the financial crisis as some of these investigations dig deeper," said Bruce Simon, a San Francisco attorney who specializes in securities law.




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