NU Online News Service, Dec. 9, 3:24 p.m. EST

Morgan Stanley became the sixth financial institution to be suedby guarantee insurer MBIA Insurance Corp.

Morgan Stanley defrauded the insurer when purchasing insurancefor its mortgage backed securities, MBIA claimed in a lawsuit.

The Armonk, N.Y.--based guarantee insurer filed suit in the Supreme Court of the State of New York inWestchester County, claiming Morgan Stanley created a pool ofapproximately 5,000 residential mortgages and sold them asmortgage-backed securities to another unit within Morgan Stanley.The company then purchased insurance from MBIA in excess of $223million.

MBIA contended that the securities, which were marketed ashighly-rated mortgages, were in fact sub-prime mortgages that MBIAsaid "did not comply with Morgan Stanley's underwriting guidelinesor the originators' underwriting guidelines."

MBIA said a vast number of the loans "were made to borrowers whocould not reasonably have been expected to be able to repay theirmortgage debt." If the insurer was aware of these facts, it said inits court filing, that it would not have issued the insurancepolicies.

Under the agreement, Morgan Stanley was to repurchase or "cure"the defective mortgages, something MBIA said the firm has failed todo.

MBIA said it has so far paid more than $71 million, and expectsto pay substantially more.

MBIA said it is seeking to recover the money, plus expensesincluding attorney's fees.

So far, MBIA has sued Bank of America and CountrywideFinancial--which was bought by Bank of America--GMAC Mortgage;Residential Funding Co., LLC; Federal Deposit Insurance Corp. asconservator of IndyMac Federal Bank; Merrill Lynch and CreditSuisse Securities. As in the Morgan Stanley case, MBIA contendsthat the other companies deceived it into believing that thesecurities it insured were of high quality when they were not.

Morgan Stanley has denied MBIA's claim and said it will defenditself vigorously.