NEW YORK (TheStreet) -- California Attorney General Kamala Harris is showing her hand as Morgan Stanley (MS) faces off against a powerful federal and state mortgage task force, a strategy that may lead to a larger payout for the state in a potential settlement.
Morgan Stanley disclosed Tuesday the California AG "has made certain preliminary conclusions that the Company made knowing and material misrepresentations regarding RMBS [residential mortgage backed securities] and that it knowingly caused material misrepresentations to be made regarding the Cheyne SIV, which issued securities marketed to the California Public Employees Retirement System."
Morgan Stanley added the California AG "has further indicated that it believes the Company's conduct violated California law and that it may seek treble damages, penalties and injunctive relief."
Morgan Stanley added it does not agree with these conclusions and has presented defenses to them to the California AG.
California's Harris is one of five state AGs that have been most active on what is known as the RMBS Working Group. Established by President Obama in 2012 and led by the U.S. Justice Department, the group extracted a $7 billion settlement from Citigroup (C) in July and a $13 billion penalty from JPMorgan Chase (JPM) in November. Harris and the other active AGs, from New York, Massachusetts, Delaware and Illinois, have successfully won cash payouts for their states, while other states that have been harder hit by the mortgage crisis, such as Nevada and Florida, extracted no cash from either settlement.
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Harris is the sister-in-law of Tony West, associate U.S. attorney general and vice-chair of the RMBS Working Group.
The biggest cash payout to any state so far was $613 million that went to New York state AG Eric Schneiderman in the JPMorgan settlement. The fact that Schneiderman actually filed a lawsuit against JPMorgan in 2012 was a big reason the state got such a large payout, according to spokesman Matt Mittenthal. Few working group members have actually filed lawsuits against banks over RMBS even though many have open investigations they haven't disclosed publicly.
The group is working on at least a dozen other cases including a potential $17 billion deal with Bank of America (BAC). Goldman Sachs (GS) confirmed in its first quarter 10-Q, filed May 9, that it is also target of the group.
Morgan Stanley spokesman Mark Lake, California AG spokesman Nicholas Pacilio and U.S. Justice Dept. spokeswoman Ellen Canale all declined comment.