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UPDATE 2-Morgan Stanley says California AG may sue over mortgage bonds
August 5, 2014 / 9:36 PM / 3 years ago

UPDATE 2-Morgan Stanley says California AG may sue over mortgage bonds

(Adds California's attorney general spokesman comment, paragraph 5)

NEW YORK, Aug 5 (Reuters) - California's attorney general may sue Morgan Stanley over money-losing mortgage bonds that the state's biggest public pension fund purchased in a $1.3 billion deal before the financial crisis, the bank said in a securities filing on Tuesday.

The state's top lawyer "indicated that it has made certain preliminary conclusions that the company made knowing and material misrepresentations regarding (residential mortgage-backed securities)," Morgan Stanley said in its 10-Q filing with the U.S. Securities and Exchange Commission.

The attorney general also indicated "that it believes the company's conduct violated California law and that it may seek treble damages, penalties and injunctive relief," Morgan Stanley said. The bank said it disagrees with the findings and presented defenses.

The alleged misrepresentations pertain to a structured investment vehicle called Cheyne Finance LLC, which went bankrupt in 2007. California's state pension fund, known as CalPERS, bought $1.3 billion worth of the vehicle.

A spokesman for California Attorney General declined to comment on the matter. A Morgan Stanley spokesman said the bank had no comment beyond what is in the filing.

Morgan Stanley also said a separate mortgage litigation matter reduced its second-quarter earnings per share by two cents, to 92 cents per share instead of 94 cents per share. The reduction stems from a $275 million settlement with the U.S. Securities and Exchange Commission that Morgan Stanley reached after initially reporting earnings on July 17. (Reporting by Lauren Tara LaCapra; additional reporting by Jonathan Stempel; Editing by Chris Reese and David Gregorio)

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