Morgan Stanley 2014 Annual Report Download - page 91

Other Matters.
Legal.
On February 25, 2015, the Company reached an agreement in principle with the United States Department of
Justice, Civil Division and the U.S. Attorney’s Office for the Northern District of California, Civil Division
(collectively, the “Civil Division”) to pay $2,600 million to resolve certain claims that the Civil Division
indicated it intended to bring against the Company related to legacy residential mortgage matters. This agreement
in principle resulted from very rapidly evolving deliberations with the Civil Division, including meetings on
February 18 and 19 and negotiations which continued through February 25, 2015.
In connection with the resolution of this matter, the Company has, subsequent to the announcement of the
Company’s 2014 earnings on January 20, 2015, increased previously established legal reserves for this settlement
and other legacy residential mortgage matters by $2,798 million, which increased Other expenses within the
Company’s Institutional Securities business segment for the year ended December 31, 2014. This decreased
income from continuing operations by $2,670 million and diluted EPS from continuing operations by $1.35 for
the year ended December 31, 2014. The Civil Division legal matter was considered to be a recognizable
subsequent event requiring adjustment to the Company’s December 31, 2014 consolidated financial statements
under U.S. GAAP.
While the Company and the Civil Division have reached an agreement in principle to resolve this matter, there
can be no assurance that the Company and the Civil Division will agree on the final documentation of the
settlement.
The Company incurred legal expenses of $3,411 million in 2014, $1,952 million in 2013 and $513 million in
2012. The legal expenses incurred in 2014 were primarily due to reserve additions related to the agreement
reached in principle with the Civil Division mentioned above, as well as reserves related to certain claims that
other members of the RMBS Working Group of the Financial Fraud Enforcement Task Force have indicated they
intend to bring against the Company. The legal expenses incurred in 2013 and 2012 were primarily due to reserve
additions and settlements related to legacy residential mortgage-backed securities and credit crisis related matters
(see “Contingencies—Legal” in Note 13 to the Company’s consolidated financial statements in Item 8). Legal
expenses are included in Other expenses in the Company’s consolidated statements of income. The Company
expects future legal expenses in general to continue to be elevated, and the changes in expenses from period to
period may fluctuate significantly, given the current environment regarding financial crisis related government
investigations and private litigation affecting global financial services firms, including the Company.
Return on Equity Goal.
The Company is aiming to improve its returns to shareholders with a goal of achieving a 10% or more return on
average common equity excluding DVA (“Return on Equity”), subject to the successful execution of its strategic
objectives.
The Company plans to progress toward achieving its Return on Equity goal through the following strategies. In
the Wealth Management business, the Company plans to continue to improve profitability through cost discipline
and revenue growth, as reflected in a pre-tax margin target of 22% to 25% by year-end 2015. In the Fixed
Income and Commodities businesses, the Company plans to improve its Return on Equity to more than 10% over
time by: optimizing the Commodities business through reducing exposure to physical commodities; pursuing in
the Fixed Income business, a more centralized decision-making process with more strategic resource allocation
and a focus on expenses, leveraging technology, capital and balance sheet optimization; and the continued
reduction of RWAs. Across the entire organization, the Company plans to pursue the following: executing its
overall expense reduction plan and improving both compensation and non-compensation expense ratios; growing
earnings through Morgan Stanley-specific opportunities, particularly with respect to deposit growth in its U.S.
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