Morgan Stanley Must Face Claims on $694 Million Securities Deal

By Chris Bruce

Morgan Stanley must face a German bank’s claims that it misrepresented underlying mortgage loans in a $694 million purchase of mortgage-backed securities, a New York court said June 20 ( Deutsche Zentral-Genossenschaftsbank AG v. Morgan Stanley , N.Y. App. Div., 654035/12-3910-3909, 6/20/17 ).

Deutsche Zentral-Genossenschaftsbank AG of Frankfurt said Morgan Stanley’s offering materials understated the mortgages’ loan-to-value ratios and overstated their owner-occupancy rates. DZ Bank said the alleged misrepresentations caused it to take on more risk than it intended.

A lower New York court denied Morgan Stanley’s motion to dismiss the fraud claims, and the New York Supreme Court’s appellate division upheld that ruling. Although Morgan Stanley said the fraud claims are barred by a German statute of limitations, the appeals court, in a brief order, said the lower court “properly declined” to dismiss the fraud claims “given the incomplete record as to the applicable German legal standards.”

Morgan Stanley did not imemdiately respond to a request for comment on the ruling.

James P. Rouhandeh of Davis Polk & Wardwell in New York represented Morgan Stanley. Mark S. Arisohn of Labaton Sucharow in New York represented Deutsche Zentral-Genossenschaftsbank AG.

To contact the reporter on this story: Chris Bruce in Washington at cbruce@bna.com

To contact the editor responsible for this story: Michael Ferullo at MFerullo@bna.com

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