The Securities and Exchange Commission published a statement on Thursday, July 24th, announcing that it had charged investment bank Morgan Stanley (NYSE:MS) with misleading investors about two residential mortgage-backed securities it issued in 2008. Furthermore, the bank had agreed to pay $275 million to settle the charges.
The SEC determined that the bank had not provided investors with the correct information regarding the delinquency rates of the mortgage bundled in the securities, according to the statement.
As part of the settlement agreement, Morgan Stanley (NYSE:MS) neither admitted nor denied the charges. Of note, the charges were filed as an administrative proceeding rather than in federal court.
Statements from Morgan Stanley and SEC Enforcement Division Chief
“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,” explained Michael Osnato, the chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.
“We’re pleased to settle the matter,” said Mark Lake, a spokesman for Morgan Stanley, who was not able to elaborate further at this time.
Violations apparently not considered fraud
The SEC said they found that Morgan Stanley (NYSE:MS) had a chart showing 17% of the loans in question were delinquent on the cutoff date, but told investors the issue only had 1% delinquent loans and used payment data from a different date to support their contention. Furthermore, the bank it did not tell investors it had to delay the closing of another issue by a month, at which time the number of delinquent loans had reached 4.5% of the total loans.
The bank allegedly violated a law prohibiting securities issuers from making untrue statements to customers or failing to provide adequate information. The case was largely about Morgan Stanley’s failures to reveal the actual rate of delinquencies in the issues.
A defense lawyer not involved in the case pointed out was notable that the SEC’s announcement did not use the word “fraud.”
“It’s unusual for it not to appear here,” noted Thomas Gorman, a partner at Dorsey & Whitney in DC. “I would imagine that word was negotiated out of these papers.”
A spokeswoman for the SEC did not offer any further comment.