Investment firm Morgan Stanley [1] is currently negotiating a possible settlement with the office of New York Attorney General [2] Eric Schneiderman over the mishandling of subprime mortgage loans in the run-up to the housing market crash and financial crisis, according to multiple media reports [3].
According to a regulatory filing from Morgan Stanley, the New York AG said on January 13 that it planned to file a lawsuit against the investment firm under the Martin Act, a New York law that allows the state's AG to file such suits with regards to financial fraud. The suit in this case is over alleged omissions of material information for 30 subprime securitizations on the part of Morgan Stanley, calling into question the investment firm's due diligence, underwriting, and valuation processes, according to reports.
A spokesperson from Schneiderman's office, when reached by email, declined to comment on the lawsuit or the possibility of a settlement. According to Morgan Stanley's regulatory filing, the investment firm disagrees with the allegations and has presented Schneiderman's office with defenses, the reports said.
The settlement talks with the New York AG are separate from an agreement Morgan Stanley made last week with the U.S. Department of Justice to pay $2.6 billion to resolve similar claims the handling of residential mortgage-backed securities.
Morgan Stanley, a worldwide investment firm that is headquartered in New York, has had ongoing legal troubles in the last year with regards to its sales of RMBS prior to the financial crisis, resulting in a series of settlements totaling hundreds of millions.
In mid-February, Morgan Stanley made a motion [4] in the New York Supreme Court to dismiss two lawsuits filed by the Federal Housing Finance Agency (FHFA [5]) accusing the firm of failing to buy back $2.5 billion worth of faulty residential mortgage-backed securities.
In February 2014, the firm settled a separate lawsuit [6] filed by FHFA for $1.25 billion over the selling of faulty RMBS to Fannie Mae and Freddie Mac during the run-up to the financial crisis.