Morgan Stanley 2014 Annual Report Download - page 259

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In the ordinary course of business, the Company guarantees the debt and/or certain trading obligations (including
obligations associated with derivatives, foreign exchange contracts and the settlement of physical commodities)
of certain subsidiaries. These guarantees generally are entity or product specific and are required by investors or
trading counterparties. The activities of the Company’s subsidiaries covered by these guarantees (including any
related debt or trading obligations) are included in the Company’s consolidated financial statements.
Contingencies.
Legal. In the normal course of business, the Company has been named, from time to time, as a defendant in
various legal actions, including arbitrations, class actions and other litigation, arising in connection with its
activities as a global diversified financial services institution. Certain of the actual or threatened legal actions
include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of
damages. In some cases, the entities that would otherwise be the primary defendants in such cases are bankrupt
or are in financial distress. These actions have included, but are not limited to, residential mortgage and credit
crisis related matters. Over the last several years, the level of litigation and investigatory activity (both formal
and informal) by governmental and self-regulatory agencies has increased materially in the financial services
industry. As a result, the Company expects that it may become the subject of increased claims for damages and
other relief and, while the Company has identified below any individual proceedings where the Company
believes a material loss to be reasonably possible and reasonably estimable, there can be no assurance that
material losses will not be incurred from claims that have not yet been asserted or are not yet determined to be
probable or possible and reasonably estimable losses.
The Company contests liability and/or the amount of damages as appropriate in each pending matter. Where
available information indicates that it is probable a liability had been incurred at the date of the consolidated
financial statements and the Company can reasonably estimate the amount of that loss, the Company accrues the
estimated loss by a charge to income. The Company expects future litigation accruals in general to continue to be
elevated and the changes in accruals from period to period may fluctuate significantly, given the current
environment regarding government investigations and private litigation affecting global financial services firms,
including the Company.
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 an agreement
reached 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, 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 were primarily due to settlements and reserve additions related to various matters, including the Company’s
February 7, 2014 agreement to settle the Federal Housing Finance Agency as Conservator v. Morgan Stanley et
al. litigation for $1,250 million and the Company’s January 30, 2014 agreement in principle with the Staff of the
Enforcement Division of the U.S. Securities and Exchange Commission (the “SEC”) to resolve an investigation
related to certain subprime RMBS transactions for $275 million.
In many proceedings and investigations, however, it is inherently difficult to determine whether any loss is
probable or even possible or to estimate the amount of any loss. In addition, even where loss is possible or an
exposure to loss exists in excess of the liability already accrued with respect to a previously recognized loss
contingency, it is not always possible to reasonably estimate the size of the possible loss or range of loss.
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