Morgan Stanley 2014 Annual Report Download - page 260

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For certain legal proceedings and investigations, the Company cannot reasonably estimate such losses,
particularly for proceedings and investigations where the factual record is being developed or contested or where
plaintiffs or governmental entities seek substantial or indeterminate damages, restitution, disgorgement or
penalties. Numerous issues may need to be resolved, including through potentially lengthy discovery and
determination of important factual matters, determination of issues related to class certification and the
calculation of damages or other relief, and by addressing novel or unsettled legal questions relevant to the
proceedings or investigations in question, before a loss or additional loss or range of loss or additional loss can be
reasonably estimated for a proceeding or investigation.
For certain other legal proceedings and investigations, the Company can estimate reasonably possible losses,
additional losses, ranges of loss or ranges of additional loss in excess of amounts accrued, but does not believe,
based on current knowledge and after consultation with counsel, that such losses will have a material adverse
effect on the Company’s consolidated financial statements as a whole, other than the matters referred to in the
following paragraphs.
On March 15, 2010, the Federal Home Loan Bank of San Francisco filed two complaints against the Company
and other defendants in the Superior Court of the State of California. These actions are styled Federal Home
Loan Bank of San Francisco v. Credit Suisse Securities (USA) LLC, et al., and Federal Home Loan Bank of
San Francisco v. Deutsche Bank Securities Inc. et al., respectively. Amended complaints filed on June 10, 2010
allege that defendants made untrue statements and material omissions in connection with the sale to plaintiff of a
number of mortgage pass-through certificates backed by securitization trusts containing residential mortgage
loans. The amount of certificates allegedly sold to plaintiff by the Company in these cases was approximately
$704 million and $276 million, respectively. The complaints raise claims under both the federal securities laws
and California law and seek, among other things, to rescind the plaintiff’s purchase of such certificates. On
August 11, 2011, plaintiff’s federal securities law claims were dismissed with prejudice. The defendants filed
answers to the amended complaints on October 7, 2011. On February 9, 2012, defendants’ demurrers with
respect to all other claims were overruled. On December 20, 2013, plaintiff’s negligent misrepresentation claims
were dismissed with prejudice. A bellwether trial was scheduled to begin in January 2015. The Company was not
a defendant in connection with the securitizations at issue in that trial. On May 23, 2014, plaintiff and the
defendants in the bellwether trial filed motions for summary adjudication. On October 15, 2014, these motions
were denied. On December 29, 2014 and January 13, 2015, the defendants in the bellwether trial informed the
court that they had reached a settlement in principle with plaintiff. At December 25, 2014, the current unpaid
balance of the mortgage pass-through certificates at issue in these cases was approximately $283 million, and the
certificates had incurred actual losses of approximately $7 million. Based on currently available information, the
Company believes it could incur a loss for this action up to the difference between the $283 million unpaid
balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment
against the Company, or upon sale, plus pre- and post-judgment interest, fees and costs. The Company may be
entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a
judgment.
On July 15, 2010, China Development Industrial Bank (“CDIB”) filed a complaint against the Company, styled
China Development Industrial Bank v. Morgan Stanley & Co. Incorporated et al., which is pending in the
Supreme Court of the State of New York, New York County (“Supreme Court of NY”). The complaint relates to
a $275 million credit default swap referencing the super senior portion of the STACK 2006-1 CDO. The
complaint asserts claims for common law fraud, fraudulent inducement and fraudulent concealment and alleges
that the Company misrepresented the risks of the STACK 2006-1 CDO to CDIB, and that the Company knew
that the assets backing the CDO were of poor quality when it entered into the credit default swap with CDIB. The
complaint seeks compensatory damages related to the approximately $228 million that CDIB alleges it has
already lost under the credit default swap, rescission of CDIB’s obligation to pay an additional $12 million,
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