Allegations against
Morgan Stanley
(
MS
) over the sale of mortgage-backed securities are far from over.
Recently, one of the top U.S. life insurers,
Prudential Financial Inc.
(
PRU
), has brought up charges against Morgan Stanley for the sale of $1
billion in residential mortgage-backed securities that the former
had bought, according to a Bloomberg report.
The company has been accused of making false statements as well
as omitting material facts prior to Prudential's purchase of the
residential mortgage-backed securities which were issued with 41
mortgage-loan securitizations between July 2004 and August
2007.
Prudential alleged that Morgan Stanley had wrongfully asserted
that underwriting standards for the mortgages were met and home
loans were lawfully assessed. However, a significant part of the
mortgage loans, which backed those securities defaulted, were
foreclosed or became delinquent.
As a result, the value of these securities plummeted and
Prudential incurred significant losses on its investments in such
securities which exceeded $350 million. Prudential is claiming for
both compensatory as well as punitive damages.
Recent
Allegations
Morgan Stanley has encountered similar allegations in the recent
past. The company has faced lawsuits from companies such as Asset
Management Fund and
MetLife Inc.
(
MET
) which accused Morgan Stanley of fraudulent activities including
misrepresentation of facts over the sale of securities.
Asset Management Fund has sued the company over its $122.4
million purchase of residential mortgage backed securities. On the
other hand, MetLife has brought forth charges against Morgan
Stanley over its acquisition of $757 million in residential
mortgage-backed securities in 2006 and 2007.
Moreover, in April, Morgan Stanley has been asked by the Federal
Reserve to review the foreclosures made by Saxon mortgage servicer
prior to the unit's sale and subsequently reimburse the affected
borrowers.
In Conclusion
The role of residential mortgage backed securities behind the
recent financial crisis and the fraudulent activities related to
the sale of such instruments have been severely criticized. In
fact, several of the Wall Street biggies are stuck with similar
allegations. Their code of conduct with respect to the sale of such
instruments has been questioned.
We believe that these lawsuits further increase the company's
litigation risk and also represent a threat to scathe the company's
financials to some extent. However, if proved or settled, the
investors can breathe some relief.
Currently, the shares of Morgan Stanley have a Zacks #3 Rank,
which translates into a short-term Hold rating. Additionally,
considering the fundamentals we maintain our long-term Neutral
recommendation on the stock.
METLIFE INC (MET): Free Stock Analysis Report
MORGAN STANLEY (MS): Free Stock Analysis Report
PRUDENTIAL FINL (PRU): Free Stock Analysis
Report
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