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Last week, German lender DZ Bank AG filed a lawsuit against Morgan Stanley (MS - Analyst Report), for misrepresentation of documents while selling mortgage-backed securities (MBS). The complaint indicts Morgan Stanley of presenting modified documents related to the sale of more than $694 million in residential mortgage-backed securities (RMBS).

The Allegation

The German lender accused Morgan Stanley of issuing misleading statements with omissions related to mortgage-backed securities and concealment of risks associated with these securities. The plaintiff claims that the documents used for offering the securities contained fraudulent statements or omissions regarding the risks associated with the investments. Misinterpretation of these risks led to the investments, which incurred losses at current levels.

The case has been filed in the New York State Supreme Court in Manhattan and the company demands compensation for the damages. However, Morgan Stanley has refrained from commenting on the issue.

Others Facing Similar Issues

This year, similar actions has been taken against other banking majors, including JPMorgan Chase & Co. (JPM - Analyst Report), HSBC Holdings Plc. , UBS AG (UBS - Analyst Report), Citigroup Inc. (C - Analyst Report), Bank of America Corporation (BAC - Analyst Report) and The Goldman Sachs Group Inc. (GS - Analyst Report).

Our Viewpoint
Trouble has been brewing for Morgan Stanley for quite sometime now, as only recently it was sued by two other German lenders – IKB Deutsche Industriebank AG (IKB) and HSH Nordbank AG in the Supreme Court over the same issue worth $147.1 million and $524 million, respectively.

A slew of lawsuits have continued for major U.S. banks since the financial meltdown. Numerous lawsuits alleging banks of such wrongdoings are expected to tarnish their reputation and financials over time. However, investors and other financial institutions bearing the brunt of these faulty practices are expected to be fairly compensated.

Morgan Stanley currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We believe such lawsuits against the company might lead to negative estimate revisions, which in turn may result in a downgrade in the Zacks Rank.

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