(Adds quote from lawyer, details on administrative proceeding)
By Emily Flitter and Sarah N. Lynch
NEW YORK/WASHINGTON, July 24 The U.S. Securities
and Exchange Commission said on Thursday it had charged Morgan
Stanley with misleading investors about two residential
mortgage-backed securities it issued before the 2008 financial
crisis, and that the bank would pay $275 million to settle the
case, according to a press release.
The SEC found Morgan Stanley had not given investors the
correct information about how many of the mortgages they
contained were delinquent, the release said.
The RMBS market reached $2.2 trillion in 2007 but a wave of
mortgage defaults made the values of many of the securities
plunge in 2008, causing the investment banks Bear Stearns and
Lehman Brothers to collapse and eventually leading to a credit
and liquidity crisis on Wall Street and a deep recession.
"Morgan Stanley understated the number of delinquent 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," said
Michael Osnato, the chief of the SEC Enforcement Division's
Complex Financial Instruments Unit, in the release.
As part of the settlement, Morgan Stanley neither admitted
nor denied the charges, which were filed as an administrative
proceeding, not in federal court.
"We're pleased to settle the matter," said Mark Lake, a
spokesman for Morgan Stanley.
The two RMBS issues in the case, Morgan Stanley ABS Capital
I Inc. Trust 2007-NC4 and Morgan Capital I Inc. Trust 2007-HE7,
were the last subprime RMBS Morgan Stanley sponsored, issued and
underwrote. According to the SEC, the two deals' offering
documents said less than 1 percent of their loan pools'
principal balances were delinquent at the time the securities
were formed. In reality, they were much higher.
The SEC said Morgan Stanley had a chart showing 17 percent
of the loans in HE7 were delinquent on its cutoff date, but
described the issue to investors as containing only 1 percent
delinquent loans by using payment data from a different date.
And it did not tell investors it had had to delay the closing of
NC4 by a month, at which time the number of delinquent loans
made up 4.5 percent of the total.
The statute the bank allegedly violated prohibits securities
issuers from making untrue statements to customers or failing to
give them necessary information. The SEC's case focused on
Morgan Stanley's failures to reveal the true level of
delinquencies in the issues.
Nevertheless, a defense lawyer who was not involved in the
case said it was notable that the SEC's announcement did not
contain the word "fraud."
"It's unusual for it not to appear here," said Thomas
Gorman, a partner at Dorsey & Whitney in Washington.
"I would imagine that that word was negotiated out of these
papers." A spokeswoman for the SEC declined to comment.
The SEC said it would give the settlement money to investors
who were harmed by the bank's misrepresentations. The
spokeswoman declined to disclose the identities of the
(Reporting by Emily Flitter in New York and Sarah N. Lynch in
Washington; Editing by James Dalgleish)