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California AG files lawsuit against Morgan Stanley over complex investments

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California AG files lawsuit against Morgan Stanley over complex investments

CaliforniaAttorney General Kamala Harris on April 1 filed a lawsuit against formisrepresentations of complex investments such as residential mortgage-backedsecurities, in which large pools of home loans were packaged together and soldto investors.

Themisrepresentations contributed to the global financial crisis and to majorlosses by investors including California's public pension funds, according to anews release from the attorney general's office.

Thecomplaint, filed in the San Francisco Superior Court, alleged Morgan Stanleyviolated the False Claims Act, the California Securities Law and other statelaws by concealing or understating the risks of intricate investments involvinglarge numbers of underlying loans or other assets. Besides RMBS, the complaintfocused on "structured investment vehicle" investments, which alsoinvolved other types of debt of individuals and corporations.

Specifically,the complaint alleged that, from 2004 to 2007, Morgan Stanley assembled andsold billions of dollars in mortgage-backed securities, many of which containedrisky loans made by Morgan Stanley subsidiary Saxon, or by New Century, amortgage lender which received crucial funding from Morgan Stanley.

Thelawsuit arises from a multiyear investigation into the issuance and rating ofmortgage-backed securities by Attorney General Harris' California mortgagefraud strike force.

MorganStanley does not believe the case has merit and will defend itself "vigorously,"Bloomberg News reported, citing a statement by Morgan Stanley spokesman MarkLake.