UPDATE 1-Morgan Stanley could pay $275 million to settle SEC probe

Tue Feb 25, 2014 6:26pm EST

By Lauren Tara LaCapra

NEW YORK Feb 25 (Reuters) - Morgan Stanley has reached a $275 million proposed settlement with the U.S. Securities and Exchange Commission that would allow the Wall Street bank to move past a substantial legal overhang from the financial crisis.

Morgan Stanley said in an annual filing on Tuesday that it has reached an "agreement in principle" with SEC enforcement staff that would not require it to admit any wrongdoing.

The SEC has been investigating Morgan Stanley's role as a sponsor and underwriter of subprime mortgage-backed bonds that lost money soon after being issued in 2007. Its investigation is part of a broader probe of such deals across Wall Street in the run-up to the 2007-2009 financial crisis.

Morgan Stanley's settlement would follow similar deals reached between the agency and rivals including Goldman Sachs Group Inc, Citigroup Inc and JPMorgan Chase & Co . Earlier this month, Morgan Stanley also said it would pay $1.25 billion to settle a lawsuit by a U.S. housing regulator over mortgage-backed bonds.

The SEC agreement is not final, and may not be approved by the commission, Morgan Stanley said. Other SEC settlements with banks that did not include an admission of wrongdoing have been lambasted by critics including U.S. District Judge Jed Rakoff, who rejected one such settlement.

Morgan Stanley still faces a host of litigation from private parties and government entities, much of which pertains to mortgage bonds and derivatives that were constructed in the run-up to the mortgage crisis. Its legal issues took up 11 pages of its 300-plus page 10-K filing, and dented earnings last year.

Morgan Stanley's litigation costs soared to $1.95 billion in 2013 from $513 million the prior year, and $151 million in 2011, the company said in its filing. Last year, legal costs represented 16.7 percent of Morgan Stanley's operating expenses excluding compensation, up from 5.1 percent in 2012 and 1.5 percent in 2011.

Additional legal reserves reduced the earnings per share Morgan Stanley reported in January by 5 cents. Full-year earnings per share fell from $1.41 to $1.36, and fourth-quarter earnings per share fell from 7 cents to 2 cents.

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