Investment bank faces possible suit over CalPERS investment losses

08/06/2014 3:51 PM

10/07/2014 8:35 PM

California officials are threatening to sue investment bank Morgan Stanley over a series of toxic real estate investments that allegedly cost CalPERS nearly $200 million.

Morgan Stanley, in a Securities and Exchange Commission filing earlier this week, said it was told by California Attorney General Kamala Harris in early May to expect a lawsuit over its marketing of the investments, which were made during the housing boom. Harris said the bank misled investors and she is likely to seek triple damages.

In its filing, the bank said it “does not agree with these conclusions and has presented defenses” to the attorney general. A spokesman for Harris declined comment.

The bank said the potential lawsuit revolves around its marketing of “structured investment vehicles,” a series of deals developed by a firm called Cheyne Finance. The vehicles were grab bags of mortgage loans and other assets.

CalPERS lost $199.7 million on the Cheyne investments, according to a lawsuit the state filed last year against the Standard & Poor’s credit-rating firm. The lawsuit accused S&P of duping the California Public Employees’ Retirement System by giving the products “AAA” ratings even though the underlying investments were of dubious value.

CalPERS has filed a separate lawsuit against S&P and Moody’s Investors Service over the ratings on the Cheyne products and two other, “structured investment vehicles,” saying the pension fund lost a total of more than $1 billion on the deals. The ratings agencies have said they’ve done nothing wrong.

Morgan Stanley’s disclosure came two weeks after the bank agreed to pay $275 million to settle U.S. civil charges that it misled investors on mortgage-backed securities sold before the housing bubble burst in 2008. The bank didn’t admit or deny any wrongdoing in the settlement.

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