Morgan Stanley is being accused of discriminating against black homeowners and violating federal civil rights laws by providing strong incentives to a subprime lender to originate mortgages that were likely to go unrepaid.
The lawsuit, which seeks class-action status, was filed Monday by the American Civil Liberties Union and others on behalf of five Detroit residents and Michigan Legal Services. It was filed in U.S. District Court in New York.
"We believe these allegations are completely without merit and plan to defend ourselves vigorously," Morgan Stanley said in a statement.
The five homeowners in the lawsuit received their loans from subprime lender New Century Mortgage Corp., which has since collapsed.
The lawsuit claims Morgan Stanley pushed New Century to issue certain types of loans with no concern about risk, because it made its profit at the outset when the investment bank bundled the loans into securities and sold them.
"With this lawsuit, real victims of the subprime lending scandal are stepping forward to hold investment banks like Morgan Stanleyaccountable for the devastation the banks wrought in their lives and in our economy," ACLU Executive Director Anthony D. Romero said in a statement.
Shares of Morgan Stanley added 20 cents to $17.51 in morning trading on Monday.