It has become a common headline on InsideCounsel.com: [Insert bank here] faces SEC charges related to [financial crisis impropriety]. But, one financial institution that has not faced many Securities and Exchange Commission (SEC) charges, is Morgan Stanley. These days, the bank is even holding boring shareholder meetings because there simply aren’t many fires to put out.
However, the under-the-radar financial institution now has one SEC penalty to mark on the board. On July 24, Morgan Stanley agreed to pay $275 million to settle allegations it misled investors in two separate mortgage bonds. The penalty is the only case that the bank has faced in connection with the financial crisis.
In the case, the SEC alleged that Morgan Stanley packaged and sold two residential-mortgage-backed securities deals totaling more than $2.5 billion despite “unprecedented distress in the subprime market.” The SEC also said that the bank underreported how many of the loans backing the bonds were delinquent.
“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,” said Michael Osnato, chief of the SEC's complex-financial-instruments enforcement unit, to the Wall Street Journal.
Morgan Stanley originally announced the expected $275 million penalty in a yearly filing on Feb. 25.
While Morgan Stanley has not dealt with the SEC, the bank has paid penalties to other U.S. governmental regulators related to the financial crisis. In February 2014, the bank paid $1.25 billion to settle a lawsuit that claimed the bank knowingly sold faulty investments to Fannie Mae and Freddie Mac. And in 2013 alone, Morgan Stanley had a litigation budget of $1.95 billion.
Still, even these penalties have not strongly effected the bank’s long-term outlook. On the same day as the SEC announcement, Moody’s Investors Service raised Morgan Stanley’s outlook from stable to positive, citing continued progress on the bank’s profitability.