Morgan Stanley is currently in discussions with New York Attorney General Eric Schneiderman's office to pay $500 million to settle claims that the investment firm misrepresented the quality of residential mortgage-backed securities it sold to investors, according to multiple media reports [1].
Citing "people familiar with the matter," the Wall Street Journal [2] said in a report earlier this week that Morgan Stanley would likely pay a fine in addition to providing some amount of redress to struggling homeowners which would amount to more than half the settlement total.
The report said that an agreement is not imminent, however, and that the discussion terms had changed since it was originally reported in early March [3] that Morgan Stanley and Schneiderman's office were discussing a settlement. While consumer relief would make up more than half the settlement total, the form in which that relief is provided was not clear, according to the report.
The New York AG's office announced on January 13 that it planned to file a lawsuit against Morgan Stanley 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.
According to the financial firm's regulatory filing, the firm disagrees with the allegations and has presented Schneiderman's office with defenses.
Morgan Stanley, a worldwide investment firm that is headquartered in New York, has had ongoing legal troubles in the last year or so with regards to its sales of RMBS prior to the financial crisis, resulting in a series of settlements totaling hundreds of millions.
In late February, Morgan Stanley made an agreement [4] with the U.S. Department of Justice to pay $2.6 billion to resolve similar claims the handling of residential mortgage-backed securities.
In mid-February, the firm made a motion [5] in the New York Supreme Court to dismiss two lawsuits filed by the Federal Housing Finance Agency (FHFA [6]) 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 [7] 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.