While officials from the Government Employees’ Retirement System (GERS) said they could not comment Tuesday on the lawsuit the system recently filed against national lending giant Morgan Stanley, the news made headlines this week, with much of the information detailed on two well-known business websites.
According to articles on businessweek.com and reuters.com, the complaint was filed by GERS sometime in the last few days at a federal court in New York. GERS is looking to make it a class-action suit so other investors can join in, one report said.
"The suit has been filed," Joseph Boschulte, GERS’ chief financial officer said Tuesday. "But the system has no comment at this time because the matter is in litigation."
According to the two internet reports, the GERS suit alleges that Morgan Stanley defrauded investors by issuing $1.2 billion in risky residential mortgage-related securities that collapsed in value when the national economy took a turn for the worst. The notes — part of what’s called a collateralized debt obligation or CDO — were backed by securities issued by New Century Financial Corp., which went bankrupt in 2007, and Option One Mortgage Corp, a former subsidiary of H&R Block.
According to GERS’ suit, Morgan Stanley knew the notes were risky, but collaborated with rating agencies—namely, Moody’s Investors Service, and Standard and Poor’s—to secure a AAA rating, making the notes more attractive to investors.
"The complaint alleged Morgan Stanley knew … the assets were far riskier than the ratings suggested, but was ‘highly motivated to defraud investors’ with pristine ratings because it was simultaneously ‘shorting’ almost all the assets. This was a bet that their value would fall, which they did in 2008," according to one report.
Unfortunately, GERS was one of the investors, buying the securities issued by Morgan Stanley through one of its money managers, tasked with diversifying GERS’ investment portfolio.
In the complaint, which was quoted in part throughout the two internet reports, GERS attorneys allege that "Morgan Stanley was betting the entire investment it was promoting would fail," adding, "The firm achieved its objective.”
