UNITED STATES OF AMERICA

Before the

SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934

Release No. 89201 / June 30, 2020

ADMINISTRATIVE PROCEEDING

File No. 3-15982

In the Matter of 

MORGAN STANLEY AND CO. LLC;

MORGAN STANLEY ABS CAPITAL I INC;

and

MORGAN STANLEY MORTGAGE CAPITAL 

HOLDINGS LLC,

Respondents. 

ORDER APPROVING PLAN 

OF DISTRIBUTION

On July 24, 2014, the Commission issued an Order Instituting Cease and Desist 

Proceedings Pursuant to Section 8A of the Securities Act of 1933, Making Findings, and 

Imposing a Cease-and-Desist Order (“Order”) against Morgan Stanley and Co. LLC (f/k/a 

“Morgan Stanley and Co. Incorporated”) (“MS & Co.”), Morgan Stanley ABS Capital I Inc., 

(“MSAC”), and Morgan Stanley Mortgage Capital Holdings LLC, (“MSMCH”) (collectively, 

the “Respondents”).1 

As set forth in the Order, Respondents issued misleading public disclosures regarding the 

number of delinquent loans in two subprime residential mortgage-backed securities transactions 

offered in 2007 – Morgan Stanley ABS Capital I Inc. Trust 2007-NC4 (“NC4”) and Morgan 

Stanley ABS Capital I Inc. Trust 2007-H7 (“HE7”) (collectively the “transactions”). The Order 

held Respondents jointly and severally liable for disgorgement of $160,627,852, prejudgment 

interest of $17,995,437, and a civil penalty of $96,376,711, for a total of $275,000,000. The 

Order created a Fair Fund pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, as 

amended. Pursuant to the Order, the Respondents paid the sums ordered by the Commission (the 

“Fair Fund”). The Fair Fund is subject to the continuing jurisdiction and control of the 

Commission and is currently on deposit with the United States Department of the Treasury’s 

Bureau of the Fiscal Service (“BFS”).

By Order dated February 6, 2015, the Commission appointed Damasco and Associates 

LLP (“Damasco”) as the Tax Administrator for the Fair Fund. On June 30, 2017, the 

 

1 Securities Act Rel. No. 9617 (July 24, 2014).
2

Commission issued a Notice of Name Change of the Tax Administrator from Damasco to Miller 

Kaplan Arase LLP.

By Order dated February 4, 2016, the Commission appointed Garden City Group, LLC as 

the fund administrator for the Fair Fund and set the administrator’s bond amount at 

$275,000,000.

On May 31, 2019, the Commission issued a Notice of Proposed Plan of Distribution and 

Opportunity for Comment (“Notice”)2 pursuant to Rule 1103 of the Commission’s Rules on Fair 

Fund and Disgorgement Plans (“Rules”).3 The Notice advised interested persons that they could 

obtain a copy of the proposed plan of distribution (the “Plan” or “Distribution Plan”) from the 

Commission’s public website at http://www.sec.gov/litigation/fairfundlist.htm or by submitting a 

written request to Adriene Mixon, Esq., Assistant Chief Litigation Counsel, United States 

Securities and Exchange Commission, 444 South Flower Street, Suite 900, Los Angeles, CA 

90071.

The Notice also advised that all persons desiring to comment on the Distribution Plan 

could submit their comments, in writing, no later than thirty (30) days from the date of the

Notice: (1) by sending a letter to the Office of the Secretary, United States Securities and 

Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090; (2) by using the 

Commission’s Internet comment form (http://www.sec.gov/litigation/admin.shtml); or (3) by 

sending an email to rule-comments@sec.gov. 

On June 28, 2019, a comment letter was received from Henry J. Ricardo, Esq., suggesting 

modifications to the Plan.

By Order dated July 25, 2019, the Commission extended the time to enter an Order 

Approving or Disapproving Plan of Distribution.

 On September 5, 2019, a letter was received from Kyle A. Lonergan, Esq. responding in 

opposition to the comment letter received from Henry J. Ricardo, Esq.

After consideration, the Commission has determined to approve the Proposed Plan 

without modification. 

A. Public Comment on the Proposed Plan

Henry J. Ricardo, Esq., counsel to the Financial Guaranty Insurance Company (“FGIC”), 

submitted a letter dated June 28, 2019, objecting to the Proposed Plan’s allocation of the Fair 

Fund.

4 According to Mr. Ricardo, the Plan does not propose a fair and reasonable allocation 

because it: (1) fails to account for FGIC’s involvement as guarantor of the Class A Certificates 

 

2 Exchange Act Rel. No. 85998 (May 31, 2019).

3 17 C.F.R. § 201.1103.

4 On September 5, 2019, after the comment period had closed, Kyle A. Lonergan, Esq. submitted a letter on behalf 

of the Federal Home Loan Mortgage Corporation in response and opposition to FGIC’s comments. Freddie Mac 

makes no objections or suggested modifications to the Proposed Plan.
3

of the NC4 Trust by excluding guarantors of Eligible Certificates (such as FGIC) from the pool 

of Eligible Claimants; (2) provides insured certificate holders with a double recovery at FGIC’s 

expense; and (3) incorrectly calculates the amount of losses incurred by the NC4 Trust, and the 

appropriate allocation of the Fair Fund by failing to calculate losses as reported on Morgan 

Stanley’s institutional investor website. 

The Commission has considered the comments and concluded that no modification to the 

Plan is necessary. First, the Plan proposes to compensate Eligible Claimants who purchased 

Eligible Certificates during the relevant Eligible Purchase Period. FGIC is not a purchaser of 

Eligible Certificates, and has not presented any documentation specifically showing that it 

should be considered an assignee of the Class A Certificate holders’ share of the Fair Fund. 

Second, the Plan, at paragraph 63(c), provides for a Recovery Cap to limit the distribution 

amount to current certificate holders to his or her principal losses. This Recovery Cap provision 

of the Plan guards against a double recovery by investors. Finally, the Plan seeks to compensate 

for the harm that initial investors experienced at the time of purchase from the diminished value 

of the investment caused by Morgan Stanley’s misrepresentations. Further, allocations in the

Fair Fund are appropriately based on the disgorgement, prejudgment interest, and civil penalties 

collected from Morgan Stanley for each transaction. 

The Commission concludes that the Plan proposes a fair and reasonable methodology to 

compensate investors in the NC4 and HE7 transactions harmed by Morgan Stanley’s 

misrepresentations. 

B. Approval of the Proposed Plan

For the reasons stated above, the Commission finds that the Proposed Plan should be 

approved without modification. 

II.

Accordingly, it is hereby ORDERED, pursuant to Rule 1104 of the Rules,

5

that the Plan 

is approved, and it shall be posted simultaneously with this Order on the Commission’s website 

at www.sec.gov.

By the Commission.

Vanessa A. Countryman

Secretary 

 

5

 17 C.F.R. § 201.1104.