The Justice Department’s $2.6 billion penalty is the latest in a series of settlements over charges that the firm misled investors via RMBS sales.
Morgan Stanley faces a total tally of $5 billion in penalties as it settles claims with federal and state government authorities over charges that the firm misled investors via its marketing, sale and issuance of residential mortgage-backed securities (RMBS) during the years leading up to the Great Recession.
The penalties and related payments stem from the RMBS Working Group, a federal and state law enforcement effort set up by President Barack Obama’s Financial Fraud Enforcement Task Force. The working group is charged with investigating fraud and abuse in the RMBS market that paved the way for the Great Recession, officials say.
The $5 billion that either has or will be going to the working group includes:
- A new $2.6 billion agreement with the Department of Justice (DOJ);
- Agreements with the states of New York ($550 million) and Illinois ($22.5 million);
- $225 million to the National Credit Union Administration;
- $1.25 billion to resolve claims by Federal Housing Finance Agency (FHFA) officials for alleged violations of federal and state securities laws and common law fraud in connection with RMBS instruments purchased by Fannie Mae and Freddie Mac;
- And $86.95 million to resolve federal and state securities laws claims brought by the Federal Deposit Insurance Corp. as receiver on behalf of failed financial institutions.
In a previous, related consent decree with the SEC, Morgan Stanley was penalized an additional $275 million for its RMBS activity.
The very large check that Morgan Stanley will be sending to the U.S. Department of Justice is intended to resolve claims under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), according to DOJ officials.
“FIRREA authorizes the federal government to impose civil penalties against financial institutions that violate various predicate offenses, including wire and mail fraud,” according to DOJ officials. “The settlement expressly preserves the government’s ability to bring criminal charges against Morgan Stanley, and likewise does not release any individuals from potential criminal or civil liability. In addition, as part of the settlement, Morgan Stanley promised to cooperate fully with any ongoing investigations related to the conduct covered by the agreement,” officials add.
In the DOJ agreement, Morgan Stanley officials acknowledge that the investment bank “sold billions of dollars in subprime RMBS certificates in 2006 and 2007 while making false promises about the mortgage loans backing those certificates,” said Acting U.S. Attorney Brian J. Stretch of the Northern District of California, in a prepared statement.
“Morgan Stanley touted the quality of the lenders with which it did business and the due diligence process it used to screen out bad loans,” Stretch says. “All the while, Morgan Stanley knew that in reality, many of the loans backing its securities were toxic. Abuses in the mortgage-backed securities industry such as these helped bring about the most devastating financial crisis in our lifetime.”
Morgan Stanley officials issued a statement after the DOJ announcement. “We are pleased to have finalized these settlements involving legacy residential mortgage-backed securities matters. The firm has previously reserved for all amounts related to these settlements,” according to a spokesperson for the investment bank.
The RMBS Working Group consists of attorneys, investigators, analysts and staff from multiple state and federal agencies, including the Department of Justice, U.S. Attorneys’ Offices, the FBI and the SEC, officials say.
The settlement was the result of coordinated efforts among the Civil Division’s Commercial Litigation Branch, the U.S. Attorney’s Office of the Northern District of California, FHFA-OIG investigators and the Special Inspector General for the Troubled Asset Relief Program.
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