Allstate Insurance has been notably aggressive about its soured mortgage-backed securities investments, with suits already underway against Countrywide, Citigroup, Deutsche Bank, Credit Suisse, Merrill Lynch, and J.P. MorganChase. In all of those cases, Allstate is represented by a notably aggressive law firm, Quinn Emanuel Urquhart & Sullivan. Unlike firms with big corporate practices, Quinn Emanuel has no problem filing big-ticket cases against major banks, which has helped it profit mightily in the last two years.
There is, however, one bank Quinn Emanuel won’t sue: Morgan Stanley, which is a regular litigation client of the firm. (Quinn is actually defending Morgan Stanley in Citi’s $245 million credit default swap case.) So when Allstate decided to sue Morgan Stanley for fraud in the sale of $104 million in mortgage-backed securities, something had to give. And so it did. The firm that filed Allstate’s new Manhattan state Supreme Court complaint against Morgan Stanley is Bernstein Litowitz Berger & Grossman, not Quinn Emanuel. (An Allstate spokeswoman declined to comment on the insurer’s choice of counsel; Peter Calamari of Quinn Emanuel said he could only confirm that the firm is “not free to be adverse” to Morgan Stanley.)
Of course, Bernstein Litowitz is hardly a novice when it comes to mortgage-backed securities litigation. It’s already lead counsel in MBS class actions against Merrill Lynch and Goldman Sachs, and represents individual investors in two MBS suits against Countrywide. Nor is Bernstein a stranger to MBS allegations against Morgan Stanley. The firm’s complaint on behalf of an investor called Cambridge Place names Morgan Stanley as the lead defendant.
That grounding in MBS litigation appears to serve Allstate well in the 109-page complaint Bernstein filed Tuesday. The firm cites more than 30 confidential witnesses from such mortgage issuers as New Century, AIG and Decision One; loan packagers Clayton and Lydian, and Morgan Stanley itself. (The complaint also acknowledges the rich vein of previous Morgan Stanley MBS investigations by Massachusetts state regulators, two different Congressional bodies and NPR’s This American Life.)
The assertions are pretty tantalizing: The complaint claims that Morgan Stanley manipulated the due diligence process on the mortgage loans underlying the securities it marketed to include mortgages that didn’t meet underwriting guidelines. There are also allegations of the bank tampering with loan documents and bullying loan originators and credit rating agencies.
In one of the juiciest sections of the complaint, Bernstein Litowitz cites a former Morgan Stanley MBS transaction manager who provided confidential testimony. “He would speak directly with people at the [credit rating agencies] who had lost their jobs as a result of conflicts with Morgan Stanley,” the complaint says. “[The witness] said that when a [rating agency] would assign a rating that was lower than what Morgan Stanley desired, someone at Morgan Stanley would flip his lid, and then representatives from Morgan Stanley and the CRAs would sit down and figure out how to make Morgan Stanley happy.”
The suit asserts fraud, negligent misrepresentation, and fraudulent inducement. A Morgan Stanley spokesperson told OTC the bank has no comment on the complaint.
(Reporting by Alison Frankel)