The civil monetary penalty being paid will resolve the claims under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA).
FIRREA gives federal government the authority to impose civil penalties against financial institutions that violate various predicate offenses, including wire and mail fraud.
RMBS Working Group, a financial fraud enforcement task force appointed by President Barack Obama, found that Morgan Stanley was involved in the actions that misled investors about the quality of mortgages.
According to the US Department of Justice (DOJ), Morgan Stanley agreed that it failed to disclose critical information to prospective investors about the quality of the mortgage loans underlying its RMBS and about its due diligence practices.
Acting US Attorney Brian J. Stretch said: "In today’s agreement, Morgan Stanley acknowledges it sold billions of dollars in subprime RMBS certificates in 2006 and 2007 while making false promises about the mortgage loans backing those certificates.
"Morgan Stanley touted the quality of the lenders with which it did business and the due diligence process it used to screen out bad loans. All the while, Morgan Stanley knew that in reality, many of the loans backing its securities were toxic. Abuses in the mortgage-backed securities industry such as these helped bring about the most devastating financial crisis in our lifetime."
Another $550m and $22.5m will be paid to the states of New York and Illinois to settle issues related to the sale of RMBS.
Last year, Morgan Stanley Investment Management agreed to pay $8.8m to settle charges with the US Securities and Exchange Commission (SEC) over a prearranged trading scandal or parking that favored certain clients’ accounts over others.
Image: Morgan Stanley has agreed to pay $2.6bn in settlement over deceptive practices in the marketing, sale and issuance of RMBS. Photo: courtesy of JanPietruszka / FreeDigitalPhotos.net.
