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Morgan Stanley Says Settlements Cut Second-Quarter Profit

Morgan Stanley (MS) reduced second-quarter earnings per share by 2 cents after reaching agreements to end mortgage-related lawsuits. The firm said it may face additional claims from authorities in California.

Morgan Stanley, which had initially reported earnings on July 17, reached preliminary deals that month to resolve three class-action suits, boosting legal accruals by $53 million, according to the New York-based firm’s quarterly regulatory filing yesterday. That would bring the company’s second-quarter profit to 92 cents a share.

California’s attorney general’s office separately indicated in May it may seek penalties over mortgage-backed securities marketed to the California Public Employees Retirement System, according to yesterday’s filing. The attorney general’s conclusions were preliminary and Morgan Stanley has presented defenses on the matter, the bank said.

Chief Executive Officer James Gorman’s firm has been settling cases tied to mortgage-linked securities sold before the financial crisis as he seeks to boost returns by next year. The bank agreed this year to pay more than $1.5 billion to settle claims brought by the Securities and Exchange Commission and the Federal Housing Finance Agency.

Photographer: Joshua Roberts/Bloomberg

James P. Gorman, chief executive officer of Morgan Stanley. Close

James P. Gorman, chief executive officer of Morgan Stanley.

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Photographer: Joshua Roberts/Bloomberg

James P. Gorman, chief executive officer of Morgan Stanley.

With the additional accrual and excluding certain other items, second-quarter profit was 58 cents a share. That still would have topped the 56-cent average estimate of 24 analysts surveyed by Bloomberg.

Prior Changes

Morgan Stanley has repeatedly cut profits reported weeks earlier after reaching legal settlements. In February, it reduced fourth-quarter earnings per share by 5 cents after resolving regulatory claims that the investment bank sold faulty mortgage-backed securities. In May last year, it cut the prior quarter’s earnings by 1 cent after boosting legal accruals by $32 million.

The firm also added a mortgage-related lawsuit yesterday to its list of “reasonably possible” legal losses. The case involves a clearinghouse for cooperative banks in Germany and represents a possible loss of the difference between the $284 million unpaid balance on the securities and their fair value.

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net

To contact the editors responsible for this story: Christine Harper at charper@bloomberg.net David Scheer, Dan Reichl

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