More than three years after IKB Deutsche Industriebank AG sued Morgan Stanley (MS) for over $147.1M in residential mortgage-backed securities, the brokerage firm is asking the New York appeals court to dismiss the case. Morgan Stanley claims that it was the German lender that did not conduct the necessary due diligence.
IKB claims the Morgan Stanley provided offering documents that left out or did not properly characterize different underwriting standards involving the loans that were underlying the securities. The bank claims there were misrepresentations and omissions regarding loan-to value ratios.
The lender says it received inaccurate information about the underlying loans related to how much homeowners had borrowed, the securities’ credit ratings, and the percentage of properties that were occupied by the owners. IKB cited purportedly incorrect statements made about trusts, loans, and mortgages. It accused Morgan Stanley of taking the loans from different originators and bundling them together to package the securities despite knowing there were issues that could make the RMBS problematic.
In 2014, when Morgan Stanley sought to have the securities lawsuit dismissed for lack of standing and timeliness issues. New York Supreme Court Judge Marcy Friedman threw out two claims from the case but left most of it intact. Now, Morgan Stanley is appealing Friedman’s ruling before the New York Supreme Court Appellate Division, First Department. The New York-based firm argued that sophisticated investors must demonstrate that they made an effort to confirm any alleged fraudulent statement, which it says that the lender did not do.
Morgan Stanley’s lawyer said that the IKB could have asked to look at files about the underlying loans and should not have merely depended on the offering materials presented. IKB, however, argued that the kind of examination Morgan Stanley says it should have conducted was not reasonable because with such offerings investors only have a day or two to make a decision. The lender’s lawyer argued that in the past the First Department has held that investors may rely on the offerer’s knowledge.
Morgan Stanley, which was only the underwriter of the RMBS, said that it can’t be found liable for fraud involving statements it didn’t make even if they were in the offering documents.
IKB Sues Morgan Stanley Over $147 Million in Bonds, Bloomberg, November 16, 2012
Morgan Stanley Asks Appeals Court To End IKB’s RMBS Suit, Law360, April 5, 2016