Morgan Stanley Sued: State Of California Goes After Big Bank For Billions

Morgan Stanley is being sued by the state of California for allegedly selling bad investments that eventually emptied the state’s public pension fund, according to CBS News.

California has decided to sue Morgan Stanley because of what they view as irresponsible lending behavior that led to the problem. Residential mortgage-backed securities were collected together and sold as high-risk loans to subprime lenders — a process California lawmakers are deeming irresponsible, including Attorney General Kamala Harris.

“Morgan Stanley’s conduct in this case evidenced a culture of greed and deception that helped create a devastating economic crisis and crippled California’s budget.”

The lawsuit alleges that Morgan Stanley deserves to be sued because of these risky decisions. Seniors who relied almost entirely on the California public pension funds for retirement have been devastated by the losses.

Morgan Stanley isn’t taking being sued lightly. The bank has fired back at the lawsuit, calling into question the viability of the actions of the state of California. Especially, a company statement said, when not even those suffered the heavy losses took legal action against them, reported Reuters.

“We do not believe this case has merit and intend 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.”

Morgan Stanley sued by state of California
It won’t be Morgan Stanley’s first time in court for its questionable mortgage-lending practices. (Photo by Chip Somodevilla/Getty Images)

California is suing Morgan Stanley because they believe it failed to disclose a number of things about the bundles of loans. For one, the quality of the investments was quite shaky — many of the mortgages out-valued their corresponding properties; others had already accumulated several delinquent payments. In the process, Morgan Stanley violated the False Claims Act, California Securities Law, Unfair Competition Law and practiced false advertising, says the lawsuit.

California Attorney General’s Office released a statement on Friday attempting to drive home the message of the lawsuit against Morgan Stanley. The financial institution was being sued because they had put investors at risk, the organization underlined.

“The California Public Employees Retirement System (CalPERS) and the California State Teachers Retirement System (CalSTRS) – two of the nation’s largest institutional investors – lost hundred of millions of dollars on these Morgan Stanley investments. CalPERS provides retirement security and health plans to more than 1.6 million California firefighters, peace officers, and other public employees. CalSTRS provides retirement, disability, and survivor benefits for over 850,000 of California’s pre-kindergarten through community college educators and their families.”

Morgan Stanley sued by state of California
Harris has recovered nearly $900 million from suing banks like Morgan Stanley since 2011. (Photo by Justin Sullivan/Getty Images)

The California Mortgage Fraud Strike Force, created by Harris in 2011, had already accumulated $900 million for the state’s public pensions funds. They consider the money to be recovered from heavy losses suffered due to financial speculation. Some of the biggest settlements included $300 million from both Bank of America and J.P. Morgan Chase.

“CalPERS applauds the Attorney General for her continued efforts to hold financial institutions accountable for their nefarious actions. We look forward to her success in restoring to CalPERS the money that rightfully belongs to our members and employers.”

Estimates have shown that the 2008 financial crisis cost as much as $22 trillion, reported the Government Accountability Office. Many blame entities like Morgan Stanley for creating an unstable lending environment that encouraged people to take out loans they could not afford, and then passed on the risk to turn a profit.

Do you think Morgan Stanley deserved to be sued by the state of California?

[Image via Mario Tama/Getty Images]

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