Morgan Stanley

New York Appellate Court Allows Fraud Claim to Proceed Against Morgan Stanley

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On August 11, 2016, the First Department of the Appellate Division of the Supreme Court of the State of New York affirmed a trial court ruling that investor-plaintiff IKB International to proceed with claims that RMBS sponsor and underwriter Morgan Stanley knowingly misrepresented loans’ credit quality and characteristics. The Court affirmed a ruling that justifiable reliance was adequately pleaded as the complaint contained allegations that (i) plaintiffs hired investment advisors to analyze the offering documents for the 18 RMBS deals at issue; and (ii) plaintiffs lacked the access to (and the ability to demand) loan files prior to purchase.

Additionally, the Court agreed that the plaintiffs adequately pleaded the fraud element of scienter by alleging that Morgan Stanly learned about the loans’ defects during the course of its own due diligence reviews, and in its role as underwriter. Order.

New York Appellate Court Reverse Lower Court, Allows RMBS Action to Proceed Against Morgan Stanley

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On August 11, 2016, the First Department of the Appellate Division of the Supreme Court of the State of New York reversed the lower court, allowing RMBS Trustee U.S. Bank to proceed with claims against Morgan Stanley in connection with alleged losses of $140 million resulting from the sale of allegedly defective loans. Following its own ruling from last year (covered here), the First Department again concluded that the alleged failure to notify securitization counterparties of breaches of representations and warranties constitutes a viable cause of action independent from claims arising from the alleged breaches themselves. The First Department also reversed dismissal of the plaintiff’s gross negligence claims noting that – notwithstanding language in the governing contract’s sole remedy provision – the law does not permit a party to insulate itself from paying for damages arising from its grossly negligent conduct. Order.

RMBS Suit to Proceed Against Morgan Stanley

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On June 16, 2016, Justice Marcy S. Friedman of the Supreme Court of the State of New York largely denied Morgan Stanley’s motion to dismiss a breach of contract action brought by RMBS trustee Wilmington Trust Company. The court dismissed the trustee’s claim for indemnification of attorney’s fees, finding that the contracts did not unmistakably contemplate such indemnification. The court denied without prejudice defendant’s motion to dismiss the trustee’s claim as to non-Morgan Stanley loans in the offering at issue, as the parties did not have the opportunity to address the import of recent RMBS precedent or whether the repurchase demand in this case included any such loans. The court will receive further briefing on the import of a 2015 intermediate appellate court decision, previously covered here, on plaintiff’s claim that the bank improperly failed to notify the trustee of breaches Morgan Stanley discovered. The court denied the remainder of Morgan Stanley’s motion to dismiss. Following her prior decisions (such as her decision in ACE on remand from the Court of Appeals, covered here), Justice Friedman held that the trustee’s claims for breach of contract were timely filed within the statute of limitations, and that its claim for damages was not precluded by the repurchase protocol. Order.

Justice Friedman of the New York Supreme Court Dismisses Two FHFA Repurchase Actions

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On April 12, 2016, Justice Marcy Friedman of the New York Supreme Court granted motions to dismiss in two RMBS breach of contract actions filed by FHFA against Morgan Stanley ABS Capital I Inc. (“MSAC”) and Morgan Stanley Mortgage Capital Holdings LLC (“Morgan Stanley”).  In the decisions, he Court dismissed the actions on similar grounds and granted the parties the opportunity to brief claims for failure to notify, in light of the October 13, 2015 First Department’s decision in Nomura Home Equity Loan Inc. Series 2006-FM2 et al. v. Nomura Credit & Capital Inc.

Like Justice Friedman’s ruling last month in ACE Securities v. DB Structured Products, Inc., which we previously covered, the Court held that both actions were not rendered untimely by the Plaintiff’s failure to file repurchase demand condition precedent prior to the filing of the summons with notice.  However, the FHFA, as certificate holder, lacked standing to commence the action and thus the Trustee’s cause of action was untimely because it did not relate back to the FHFA’s summons with notice.  In so holding, the Court rejected the Trustee’s arguments in both cases that the action was timely commenced, and also that the accrual clause in the RMBS extended the statute of limitations, and that the federal Housing and Economic Recovery Act of 2008, applicable to certain actions brought by FHFA, extended the limitations period.  Finally, the Court also held that no tolling agreements saved Trustee’s claims, and also dismissed the causes of action for breach of the implied covenant of good faith and fair dealing, breach of repurchase obligations, and anticipatory breach. Decision 116. Decision 134.

Morgan Stanley Agrees to Settlement with DOJ and NYAG Totaling $3.15 Billion

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On February 11, the U.S. Department of Justice and the Attorney General of State of New York announced dual settlement agreements with Morgan Stanley providing for the payment of $3.2 billion. The settlements relate to Morgan Stanley’s marketing, underwriting, and issuance of RMBS from 2005-2007.

In its agreement with the U.S. Department of Justice, Morgan Stanley acknowledged that it had failed to disclose that certain securitized loans did not comply with applicable underwriting guidelines, and that Morgan Stanley’s due diligence practices did not conform to those described in presentations to RMBS investors. Morgan Stanley will pay $2.6 billion to the U.S. Department of Justice, $150 million to the State of New York, and an additional $400 million in relief directly to consumers.  Payment to the U.S. Department of Justice releases Morgan Stanley from any civil claim brought under FIRREA. DOJ Settlement Agreement. State of New York Settlement Agreement.

Morgan Stanley Settles RMBS Litigation with FDIC for $63M

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On January 29, Morgan Stanley and the Federal Deposit Insurance Corporation agreed to settle five suits encompassing state and federal claims alleging that Morgan Stanley made misrepresentations in offering residential mortgage-backed securities to three now-defunct banks.  Morgan Stanley will pay $63 million to the FDIC, as receiver for Colonial Bank of Montgomery, Alabama, Security Savings Bank of Henderson, New York, and United Western Bank of Denver, Colorado.  Morgan Stanley denied all liability regarding the claims, and the settlement agreement specified that the parties settled in order to avoid further litigation.  The settlement was reached in coordination with the Department of Justice.  Settlement and Release Agreement.

New York Appellate Court Affirms Motion to Dismiss RMBS Complaint Against Morgan Stanley

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On January 12, 2016, the Appellate Division, First Department, of the New York State Supreme Court affirmed a trial court order granting Morgan Stanley’s motion to dismiss claims brought by Dexia SA’s subsidiary FSA Asset Management LLC (“FSAM”). Plaintiffs asserted fraud claims against Defendants based on allegations that Defendants knowingly misrepresented the quality of more than $626 million in RMBS sold by Morgan Stanley to Plaintiffs in 2006 and 2007.  The Court’s ruling rested on a recent New York Court of Appeals decision holding that the right to assert a fraud claim related to a contract or note does not automatically transfer with the respective contract or note, and that there must be some language to evince that intent and transfer such rights.  Specifically, the Court found that FSAM’s agreement to deliver “all right, title and interest” in the RMBS to the Dexia Plaintiffs did not transfer the right to bring fraud claims.  The Court also concluded that FSAM could not establish damages because it received from the Dexia Plaintiffs the same amount it originally paid for the securities. Opinion.

Morgan Stanley Settles RMBS Suits With NCUA

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On December 10, 2015, the National Credit Union Administration (“NCUA”) announced Morgan Stanley’s agreement to pay $225 million to settle litigation brought in New York and Kansas federal courts by NCUA as liquidating agent of U.S. Central Federal Credit Union, Western Corporate Federal Credit Union, Members United Corporate Federal Credit Union, and Southwest Corporate Federal Credit Union (the “Credit Unions”), all of which failed during the financial crisis.  In the settled claims – previously covered here and here – NCUA alleged that Morgan Stanley had materially misrepresented the collateral characteristics of RMBS it sold to the Credit Unions.  Morgan Stanley did not admit fault in the settlement. Press release.

Morgan Stanley Reaches Agreement to End DOJ Investigation into MBS Deals

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On February 25, 2015, Morgan Stanley announced that it reached an agreement in principle with the U.S. Department of Justice, Civil Division, and the U.S. Attorney’s Office for the Northern District of Califoirnia, Civil Division (collectively, the “Civil Division”) to resolve claims that the Civil Division intended to bring against Morgan Stanley related to residential mortgage-backed securities.  As part of the settlement, Morgan Stanley agreed to pay the Civil Division $2.6 billion.  The exact nature of the resolved claims and additional terms of the settlement agreement were not specified.  8-K.

$95 Million Settlement Approved in Morgan Stanley RMBS Case

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On December 18, Judge Katherine B. Forrest of the United States District Court for the Southern District of New York approved a $95 million settlement to end a class action brought by RMBS investors against Morgan Stanley. The complaint alleged that Morgan Stanley made material misrepresentations regarding its appraisals and underwriting standards of the underlying mortgages in the marketing and sale of the RMBS. Judge Forrest also granted lead plaintiffs’ application for approximately $17.2 million in attorneys’ fees and expenses.  Final Judgment.  Order Granting Attorneys’ Fees and Expenses.