Morgan Stanley to Pay $275M to SEC in Mortgage Case

“The delinquency status of mortgage loans in an RMBS securitization is vital information to investors because those loans are the primary source of funds by which they potentially can recover and profit from their investments,” said Michael Osnato, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, in a statement. “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.”

According to the SEC, the offering documents from these securitizations inaccurately stated that less than 1% of their loan pools’ principal balances were delinquent at the time the securities were formed. The SEC said Morgan Stanley had a chart showing 17% of the loans in the HE7 securitization were delinquent on its cutoff date, but described the issue to investors as containing 1% delinquent loans by using payment data from a different date. Morgan Stanley also did not tell investors that it had to delay the closing of the NC4 securitization by a month, at which time the number of delinquent loans made up 4.5% of the total. Instead, it continued with the 1% figure.

With the fees paid in this case, a fair fund will be created to return money to harmed investors.

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