By Sarah N. Lynch
WASHINGTON (Reuters) - Morgan Stanley (N:MS) will pay about $3.2 billion to settle charges that it misled investors in residential mortgage-backed securities that later soured during the financial crisis, federal and state officials said Thursday.
The case stems from an investigation by the Residential Mortgage-Backed Securities Group, a joint federal and state task force unveiled in 2012 by President Barack Obama that serves to probe potential misconduct from the financial crisis.
Of the $3.2 billion to be paid, $2.6 billion will go toward resolving claims brought by the U.S. Justice Department.
Another $550 million, meanwhile, will go to New York and another $22.5 million will settle a case with Illinois.
Thursday's case against the bank alleges that Morgan Stanley painted a rosy picture to investors about the quality of the residential mortgages it had securitized, even though the loans had material defects.
"We are pleased to have finalized these settlements involving legacy residential mortgage-backed securities matters," a Morgan Stanley spokesman said. "The firm has previously reserved for all amounts related to these settlements," he added.
The Justice Department said that as part of the accord, Morgan Stanley acknowledged that it failed to disclose information to prospective investors about the quality of the mortgages.
The Justice Department and the New York Attorney General's Office provided details about some of the internal communications at the bank in which the quality of the underlying mortgages were openly discussed.
In one May 2006 email, for instance, an employee who headed a team that was conducting due diligence on the value of the securities asked another colleague, "please do not mention the ‘slightly higher risk tolerance’ in these communications."
"We are running under the radar, and do not want to document these types of things," the person added.
In a statement, New York Attorney General Eric Schneiderman said the deal marks "another victory in our efforts to help New Yorkers rebuild in the wake of the financial devastation caused by major banks."