Morgan Stanley Sued by Federal Credit Union Regulator

Morgan Stanley, owner of the world’s largest brokerage, was sued by the federal credit union regulator over the sale of $566 million in residential mortgage-backed securities to two credit unions that failed.

The bank and three units made misleading statements about the securities in offering documents, National Credit Union Administration said in the complaint filed Aug. 16 in federal court in Kansas City, Kansas. The agency announced the lawsuit today, saying it waited until all defendants were served.

Originators of the securities “systematically abandoned the stated underwriting guidelines in the offering documents,” the agency said in a statement today. “The securities were significantly riskier than represented.”

NCUA, based in Alexandria, Virginia, previously sued securities firms run by banks including Goldman Sachs Group Inc., JPMorgan Chase & Co., Royal Bank of Scotland Plc and UBS AG over the MBS sales.

Mary Claire Delaney, a spokeswoman for Morgan Stanley, declined to comment on the allegations.

NCUA, which is responsible for covering losses to minimize costs to its industry-funded stabilization fund, said it has recovered $335 million in settlements with Bank of America Corp., Citigroup Inc., Deutsche Bank AG and HSBC Holdings Plc.

Failed Unions

The agency is seeking to recoup from Morgan Stanley losses it claimed contributed to the 2010 liquidation of U.S. Central Federal Credit Union, based in Lenexa, Kansas, and Western Corporate Federal Credit Union, based in San Dimas, California, according to the complaint.

“Firms like Morgan Stanley sold securities that turned out to be faulty, triggering a crisis in the credit union industry that has been extremely expensive to contain and repair, and credit unions are still paying the tab,” NCUA Chairman Debbie Matz said in the agency’s statement.

The case is National Credit Union Administration Board v. Morgan Stanley & Co., 13-cv-2418, U.S. District Court, District of Kansas (Kansas City).

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