Allstate sues Morgan Stanley on mortgage fraud claim

Morgan Stanley was sued for fraud by Allstate Insurance over residential mortgage-backed securities in which the insurer invested, according to a complaint filed in New York.

Northbrook-based Allstate purchased more than $104 million in Morgan Stanley residential mortgage-backed securities in six offerings between 2005 and 2007, based on registration statements, prospectuses and other documents, as well as the “central role” that Morgan Stanley played in creating and selling the securities, it said in the suit filed yesterday in New York state Supreme Court.

Morgan Stanley told Allstate it had conducted due diligence on the companies that originated the mortgages before turning them into securities, and assured Allstate that the loans conformed with “conservative” underwriting standards and that the appraisals of the mortgage properties were accurate, the lawsuit says.

“As Allstate and the world would only later discover, the originators whose loans collateralized the Morgan Stanley RMBS purchased by Allstate were among the worst of the worst culprits in the subprime lending industry,” Allstate said in the suit. “Morgan Stanley knew or recklessly disregarded that those lenders were issuing high-risk loans that did not conform to their respective underwriting standards.”

Mary Claire Delaney, a spokeswoman for New York-based Morgan Stanley, declined to comment in a telephone interview.