Morgan Stanley (MS) has agreed to pay $275 million to settle allegations of fraud related to mortgage-backed securities the firm packaged and sold ahead of the financial crisis.

The Securities and Exchange Commission said in a statement Thursday that three Morgan Stanley entities were charged with misleading investors in a pair of residential mortgage-backed securities (RMBS) that the firms underwrote, sponsored and issued.

The SEC said an investigation found that Morgan Stanley misled investors about the delinquency status of loans included in the two securities. In asset-backed securities offerings, federal laws require the disclosure of delinquency information for the mortgage loans serving as collateral, the SEC explained. 

The SEC said Morgan Stanley, the second largest U.S. investment bank, knowingly fudged the delinquency numbers as delinquencies were rising especially among subprime loans made to borrowers with weak credit during the height of the housing bubble last decade.

“The delinquency status of mortgage loans in an RMBS securitization is vital information to investors because those loans are the primary source of funds by which they potentially can recover and profit from their investments,” Michael Osnato, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, said.  “Morgan Stanley understated the number of delinquent loans behind these securitizations during a critical juncture of the financial crisis and denied investors the full extent of the facts necessary to make informed investment decisions.”

A Morgan Stanley spokesman said the firm had no comment on the settlement, but noted that the deal was disclosed to shareholders in a regulatory filing earlier this year in which the bank acknowledged putting aside reserves to pay the fine.

Morgan Stanley did not admit or deny guilt under the terms of the settlement.

The RMBS in question had a total value of $2.5 billion and were the last subprime mortgage-backed securities packaged and sold by Morgan Stanley, according to the SEC’s statement.

The SEC found that in documents targeting potential investors Morgan Stanley greatly downplayed the rate of delinquencies on loans in included in the RMBS. The firm allegedly said less than 1% of loans included in one of the securities had been delinquent at some point since the loans were originated when the delinquency rate was actually around 17%.

The SEC said all of the fine will be placed in a Fair Fund so that it can be returned to harmed investors.

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