Morgan Stanley continues to face the legal consequences of its actions leading up to and during the financial crisis. On August 11, the First Department of the Appellate Division in New York issued two decisions against the bank, both holding that claims against Morgan Stanley for its alleged misconduct involving residential mortgage backed securities (“RMBS”) should proceed.
In a case brought by trustee US Bank National Association (“US Bank”), the Appellate Division revived breach of contract and gross negligence claims against Morgan Stanley that had been dismissed by the New York Supreme Court in 2014. US Bank alleged that Morgan Stanley breached its contractual duty to notify the trustee of defects in the loans underlying the trust. On behalf of the trust, US Bank also claimed that Morgan Stanley failed to repurchase the loans after being made aware of numerous breaches of its own representations and warranties regarding the quality of the loans in the trust.
In another case brought by IKB International SA (“IKB”), a Luxembourg subsidiary of German lender and bank IKB Deutsche International AG, the First Department upheld the lower court’s 2014 denial of Morgan Stanley’s motion to dismiss IKB’s fraud claims. The court found that IKB had plausibly stated facts sufficient to show that Morgan Stanley, as underwriter of the RMBS whose name appeared on the offering documents, not only knew about the poor quality of the loans but also actively participated in the securitization process.
Morgan Stanley faces hundreds of millions of dollars in damages in both cases: the trust in the US Bank contract case suffered $111 million in losses and IKB alleges losses over $147 million in its fraud case.
The cases are: Morgan Stanley Mtge. Loan Trust 2006-13ARX v. Morgan Stanley Mtge. Capital Holdings LLC, case number 2016 NY Slip Op 05781; and IKB International SA in Liquidation et al. v. Morgan Stanley et al., case number 653964/2012.