California Sues Morgan Stanley Over ‘Massive’ Investment Losses

California officials Friday sued investment banking giant Morgan Stanley & Co. over huge losses suffered by the state’s public pension funds when the housing market crashed.

The suit accused Morgan Stanley of conning pension investment managers at CalPERS and CalSTRS into buying toxic mortgage-backed securities during the housing bubble by vastly underplaying the level of risk the notes carried.

Filed in San Francisco Superior Court, the suit doesn’t specify the amount of financial harm other than to say the two pension funds “suffered massive losses as a result of the conduct by Morgan Stanley.”

Previous lawsuits filed by state officials over the same investments pegged the two funds’ combined losses at more than $1 billion. Most of the loss was borne by CalPERS.

“This lawsuit is necessary in order to hold Morgan Stanley accountable for the destruction it caused to California, our people, and our pension funds,” said Attorney General Kamala Harris in a prepared statement.

CalPERS, the California Public Employees’ Retirement System, has spent years trying to recoup its losses from a series of deals known as “structured investment vehicles,” which were diversified portfolios of mortgages and other consumer loans. Last month it collected a $130 million settlement from Moody’s Investors Service for assigning top-notch credit ratings to the investments, which were riddled with risky loans.

Friday’s lawsuit says Morgan Stanley packaged and sold billions of dollars worth of securities, hiding the fact that many of the underlying loans were shaky and were going into default. According to the lawsuit, a Morgan Stanley employee reviewing the loans joked to a co-worker that “someone needs to benefit from this mess.”

Morgan Stanley said it will fight the lawsuit.

“We do not believe this case has merit and intend to defend it vigorously,” the bank said in a statement from its New York headquarters. “The securities at issue were marketed and sold to sophisticated institutional investors and their performance has been consistent with the sector as a whole.”