The state of California sued Morgan Stanley on Friday, accusing the bank of hiding the risks of complex mortgage debt and other securities it sold, causing big losses for the state’s public pension funds, CalPERS and CalSTRS.
Kamala Harris, the state attorney general, said Morgan Stanley concealed or downplayed the risks of toxic residential mortgage-backed securities and “structured investment vehicles” it marketed from 2004 to 2007, sometimes encouraging credit rating agencies to award unjustifiably high ratings.
She said the bank’s conduct reflected “a culture of greed and deception” that fueled the 2008 financial crisis and caused the California Public Employees’ Retirement System and California State Teachers Retirement System to lose hundreds of millions of dollars.
California accused Morgan Stanley of violating the state’s False Claims Act and various state securities laws. It seeks a variety of damages plus civil fines. The lawsuit was filed in the state superior court in San Francisco.
Morgan Stanley said it believes the lawsuit has no merit.
“The securities at issue were marketed and sold to sophisticated institutional investors and their performance has been consistent with the sector as a whole,” it said. “It is also worth noting that the alleged victim in this case elected not to pursue its own lawsuit against the firm.”
CalPERS had previously recovered hundreds of millions of dollars in settlements with agencies such as McGraw Hill Financial Inc’s Standard & Poor’s and Moody’s Corp’s Moody’s Investors Service over alleged inflated ratings.
Among the securities over which CalPERS sued was Cheyne, a structured investment vehicle that failed in 2007.
A large portion of Friday’s lawsuit challenges Morgan Stanley’s conduct in marketing the Cheyne SIV.
Shares of Morgan Stanley closed up 52 cents at $25.53 in Friday trading on the New York Stock Exchange.
The case is California v. Morgan Stanley et al, Superior Court of California, San Francisco County, No. CGC16-551238.