Morgan Stanley to Pay $275M to Settle SEC RMBS Fraud Charges

Morgan Stanley (MS) has consented to resolve Securities and Exchange Commission residential mortgage-backed securities charges by paying $275 million. The regulator had accused the firm of misrepresenting the delinquency status of mortgage loans behind two subprime RMBS during the peak of the financial crisis.

According to the SEC, not only did the firm understate how many delinquent loans were underwriting the securitizations, but also it failed to inform investors of the full scope of the facts that they needed to make informed choices. As a result, investors were defrauded.

The securitizations at issue were collateralized by mortgage loans that had an aggregate principal value balance greater than $2.5 billion. The offerings were the:

· Morgan Capital 1 Inc. Trust 2007-HE7

· Morgan Stanley ABS Capital 1 Inc. Trust 2007-NC4

These were the final subprime RMBSs sponsored, underwritten, and issued by Morgan Stanley.

According to the SEC, the securitization’s underwriting documents said that less 1% of every pool’s aggregate principal balance was more than 30 days (but no more than 60 days) delinquent from the cut off date of each securitization. The firm told investors that except for these loans, no payments on any mortgage loan were ever over 30 days delinquent. However, contends the regulator, the truth was that about 17% of the loans found in the HE7 securitization had at some point been delinquent. 4.5% of the loans in the NC4 securitization were delinquent.

The SEC also charged affiliates Morgan Stanley Mortgage Capital Holdings and Morgan Stanley ABS Capital in this matter. Morgan Stanley is settling without denying or admitting to the SEC allegations. The $275M RMBS settlement includes disgorgement, prejudgment interest, and a penalty. Investors who suffered financial harm in the securitizations will get their money back.

In other mortgage-backed securities news, credit rating agency Standard & Poor’s could soon face SEC securities fraud charges over ratings it gave to six commercial MBSs that were issued in 2011. The McGraw Hill unit says the regulator sent it a Wells notice indicating that its enforcement division plans to recommend that civil charges be filed against the credit rater.

The notice is over CMBS sold a few years back. S & P withdrew ratings on a $1.5 billion commercial mortgage-backed security after finding that there were inconsistencies in the way its rating methodology was used. The withdrawal resulted in an internal review, which unconvered methodology inconsistencies involving six other CMBSs that S & P had rated.

While a Wells notice does not mean there will definitely be a lawsuit, if the SEC does decide to file civil charges, this will be the first time that regulator will have sued a credit-rating agency.

Morgan Stanley to Pay $275 Million in Mortgage Bond Settlement, The Wall Street Journal, July 24, 2014

S&P fails to split up $5 billion U.S. fraud lawsuit, Reuters, April 15, 2014

S&P faces securities fraud charges over mortgage ratings, Financial Services, July 23, 2014


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Morgan Stanley Must Pay Connecticut Regulators $5M for Supervisory Violations, Stockbroker Fraud Blog, June 18, 2014

Morgan Stanley Gets $5M Fine for Supervisory Failures Involving 83 IPO Shares Sales, Stockbroker Fraud Blog, May 6, 2014

PNC Bank Sues Morgan Stanley & Ex-Trust Adviser For “Surreptitious Conspiracy”, Institutional Investor Securities Blog, April 3, 2014