Morgan Stanley Unit Probed by U.S. on Military Foreclosures

A unit of Morgan Stanley (MS), the sixth-largest U.S. bank by assets, and other lenders are being investigated by the Justice Department for overcharging members of the military and foreclosing on their homes without court orders.

“The Civil Rights Division has an ongoing investigation into Saxon mortgage and other lenders as well as authorized lawsuits against lenders for violations of the Servicemembers Civil Relief Act, specifically for overcharging and foreclosing against the homes of Servicemembers without court orders,” Xochitl Hinojosa, a department spokeswoman, said today in an e- mailed statement.

The investigation was revealed in a court document filed this week in a lawsuit brought in federal court in Grand Rapids, Michigan, by U.S. Army Sergeant James Hurley. He served in Operation Iraqi Freedom starting in 2004, and lost his home through an eviction proceeding in 2005 while he was still in Iraq.

The Morgan Stanley unit, Saxon Mortgage Services Inc., and a unit of Deutsche Bank AG (DBK) were responding in court papers to an effort by Hurley’s lawyers to subpoena Saxon’s general counsel to learn more about a Justice Department probe.

Introducing evidence of the investigation would result in a “monumental waste of time,” the companies said in a March 8 filing. “The Department of Justice investigation is merely a preliminary investigation based on unproven allegations, for which no liability or wrongdoing has been found.”

Mark Lake, a spokesman for New York-based Morgan Stanley, declined to comment on the federal probe.

The New York Times reported on Hurley’s lawsuit and the DOJ investigation yesterday.

The case is James B. Hurley v. Deutsche Bank Trust Company Americas, 08-cv-00361, U.S. District Court, Western District of Michigan Grand Rapids).

To contact the reporter on this story: Tom Schoenberg in Washington at tschoenberg@bloomberg.net; Joel Rosenblatt in San Francisco at jrosenblatt@bloomberg.net.

To contact the editor responsible for this story: David Rovella at drovella@bloomberg.net

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