Morgan Stanley in settlement talks with NY attorney general - source

By Karen Freifeld and Lauren Tara LaCapra

NEW YORK (Reuters) - Morgan Stanley's is in discussions with New York's attorney general to settle accusations that the Wall Street bank mishandled subprime mortgage deals before the 2008 financial crisis, a person familiar with the matter said on Monday.

Any settlement would be separate from a $2.6 billion agreement Morgan Stanley reached last month with the U.S. Department of Justice and the U.S. Attorney's Office for the Northern District of California, said the person, who was not authorized to speak publicly about the matter.

Morgan Stanley said in a regulatory filing on Monday that the New York Attorney General's office indicated on Jan. 13 that it plans to file a lawsuit over alleged misrepresentations and omissions of material information in about 30 subprime securitisations. New York Attorney General Eric Schneiderman's office indicated to Morgan Stanley that the potential lawsuit would be brought under the Martin Act, a New York law that gives extraordinary powers to an attorney general regarding financial fraud.

The accusations pertain to Morgan Stanley's due diligence, underwriting and valuation of loans in about 30 securitisations, as well as the properties securing them, the bank said.

Morgan Stanley disagrees with the allegations and has presented defences to the attorney general, the bank said in its annual 10-K regulatory filing.

Liz DeBold, a spokeswoman for Schneiderman, declined comment.

Morgan Stanley has added $2.8 billion to its legal reserves to cover outstanding matters since its earnings report in January. That amount includes the $2.6 billion agreement it reached last week to settle legacy mortgage-bond claims. [ID:nL4N0VZ4XU]

Due to that settlement, Morgan Stanley revised the 2014 earnings it reported on Jan. 20 downward to $3.15 billion, or $1.60 per share, from $5.82 billion, or $2.95 per share.

Overall, Morgan Stanley said its legal expenses last year rose to $3.41 billion from $1.95 billion in 2013.

Shares of Morgan Stanley were up 0.8 percent at $36.06 in morning trading.

(Reporting by Lauren Tara LaCapra and Karen Freifeld; Editing by Chizu Nomiyama)