California Attorney General Kamala Harris may sue Morgan Stanley over a CalPERS investment in mortgage-backed securities that resulted in a substantial loss for the state’s largest pension fund, according to a Form 10-Q filing by Morgan Stanley.
Morgan Stanley notes in the Legal Proceedings section of the filing that the California AG’s office “indicated that it has made certain preliminary conclusions that the Company made knowing and material misrepresentations regarding RMBS and that it knowingly caused material misrepresentations to be made regarding the Cheyne SIV, which issued securities marketed to the California Public Employees Retirement System. The CAAG has further indicated that it believes the Company’s conduct violated California law and that it may seek treble damages, penalties and injunctive relief.”
CalPERS purchased $1.3 billion in debt issued by Cheyne Finance, a structured-investment vehicle that went bankrupt in 2007 during the financial crisis. The Cheyne SIV issued short-term debt to fund the purchase of long-term notes with higher yields; the SIV failed when the financial crisis caused credit to dry up and borrowers defaulted on the mortgages that secured the notes.
The California AG’s office believes that Morgan Stanley was aware of the risk that caused the default but did not disclose it to CalPERS. The filing noted that Morgan Stanley disputes these allegations and that it has presented defenses to the California AG’s office.
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