MBIA Accuses Morgan Stanley Of Fraud

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

Morgan Stanley defrauded the insurer when purchasing insurance for 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 in Westchester County, claiming Morgan Stanley created a pool of approximately 5,000 residential mortgages and sold them as mortgage-backed securities to another unit within Morgan Stanley. The company then purchased insurance from MBIA in excess of $223 million.

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

MBIA said a vast number of the loans "were made to borrowers who could not reasonably have been expected to be able to repay their mortgage debt." If the insurer was aware of these facts, it said in its court filing, that it would not have issued the insurance policies.

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

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

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

So far, MBIA has sued Bank of America and Countrywide Financial--which was bought by Bank of America--GMAC Mortgage; Residential Funding Co., LLC; Federal Deposit Insurance Corp. as conservator of IndyMac Federal Bank; Merrill Lynch and Credit Suisse Securities. As in the Morgan Stanley case, MBIA contends that the other companies deceived it into believing that the securities it insured were of high quality when they were not.

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