Morgan Stanley to return $275 million to investors in shoddy mortgage bonds

by Ryan Smith28 Jul 2014
Morgan Stanley has agreed to return $275 million to investors in order to settle government probe into the sale of mortgage-backed securities.

The Securities and Exchange Commission had charged Morgan Stanly with misleading investors about the delinquency status of loans underlying subprime residential mortgage bonds.

“The delinquency status of mortgage loans in an RMBS securitization is vital information to investors because those loans are the primary source of funds by which they potentially can recover and profit from their investments,” said Michael Osnato, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit. “Morgan Stanley understated the number of delinquent loans behind these securitizations during a critical juncture of the financial crisis and denied investors the full extent of the facts necessary to make informed investment decisions.”

According to the SEC, Morgan Stanley’s offering documents for the securities stated that less than 1% of the bonds’ aggregate principal balance was 30-60 days delinquent. With that exception, Morgan Stanley claimed that no loan underlying the securities had ever been more than 30 days late. In reality, however, some 17% of the loans underlying the securities had been late.

Morgan Stanley did not admit or deny the allegations in the settlement, but agreed to a $275 million penalty. The money will be distributed to investors harmed by their investment in the securities.



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