California AG sues Morgan Stanley over complex investments

SAN FRANCISCO – Attorney General Kamala D. Harris has filed a lawsuit against investment bank Morgan Stanley for misrepresentations of complex investments.

The investments included residential mortgage-backed securities, in which large pools of home loans were packaged together and sold to investors.

Harris says the misrepresentations contributed to the global financial crisis and to major losses by investors including California’s public pension funds, which are responsible for the retirement security of state peace officers, firefighters, teachers and other public employees.

The complaint was filed Friday in San Francisco Superior Court. Harris alleges that Morgan Stanley violated state laws by concealing or understating the risks of intricate investments involving large numbers of underlying loans or other assets.

Specifically, the complaint alleges that, from 2004 to 2007, Morgan Stanley assembled and sold billions of dollars in mortgage-backed securities, many of which contained risky loans made by Morgan Stanley subsidiary Saxon, or by New Century, a mortgage lender that received crucial funding from Morgan Stanley.

Morgan Stanley spokesman Mark Lake said in a statement that the company does not believe the case has merit and it intends to defend it vigorously.

“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 is also worth noting that the alleged victim in this case elected not to pursue its own lawsuit against the firm,” Lake said in an email.