Morgan Stanley (MS.N) was ordered by a New York state judge to face part of a lawsuit in which life insurer MetLife Inc (MET.N) accused it of fraudulently selling $758 million of residential mortgage-backed securities that it knew were defective.
While dismissing some claims as having been made too late, New York State Supreme Court Justice Eileen Bransten in Manhattan said MetLife may pursue claims that Morgan Stanley knew of underwriting defects and faulty appraisals, and pushed credit rating agencies to inflate ratings for the securities.
Bransten's decision is dated July 8, but was made public on Tuesday.
In its lawsuit filed in April 2012, MetLife contended that Morgan Stanley knew that home loans underlying the securities were defective because an independent third party it had hired to conduct due diligence had found problems.
MetLife also accused Morgan Stanley of shredding documents that showed the inability of borrowers to afford their loans, so it could negotiate cheaper prices before packaging the loans into the securities, which MetLife bought in 2006 and 2007.
"Morgan Stanley was only too willing to go along with further machinations by its loan originators, which further heightened the risks for unsuspecting loan investors such as MetLife," the amended complaint said.
In her decision, Bransten said it was premature at this stage of the case to accept that Morgan Stanley disclosures were sufficient, that the bank lacked fraudulent intent, and that credit and housing market problems caused losses for MetLife.
"Morgan Stanley advances no independent arguments in favor of dismissing either the fraudulent inducement or the aiding and abetting causes of action," she wrote.
Claims that were dismissed covered securities purchased by a Connecticut unit of MetLife.
Mark Lake, a Morgan Stanley spokesman, declined to comment.
MetLife spokesman John Calagna was not immediately available for comment. Both companies are based in New York.
The case is Metropolitan Life Insurance Co et al v. Morgan Stanley et al, New York State Supreme Court, New York County, No. 651360/2012.
(Reporting by Jonathan Stempel in New York; Editing by David Gregorio)