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Sept. 15 (Bloomberg) -- Morgan Stanley was sued by Taipei-based China Development Industrial Bank for fraud to recover losses from an investment tied to residential mortgage-backed securities.

The Taiwanese bank claims Morgan Stanley made an investment linked to U.S. subprime mortgage bonds in mid-2006 and, after learning of problems with it, “dumped those losses” on CDIB in April 2007. The complaint, filed in New York state Supreme Court on July 15, was made public yesterday by CDIB’s lawyers.

“Morgan Stanley structured and sold CDIB a security that was a house of cards built on a shoddy foundation of fraudulently manipulated credit ratings,” Samuel Rudman of Robbins Geller Rudman & Dowd LLP, lead counsel for CDIB, said in a statement.

CDIB claims it was fraudulently sold a $275 million interest in what the bank called the STACK 2006-1 Ltd., a hybrid collateralized debt obligation. CDOs are pools of assets such as mortgage bonds packaged into new securities.

“We believe these allegations are wholly without merit,” Mark Lake, a spokesman for New York-based Morgan Stanley, said in a telephone interview. “We intend to defend ourselves vigorously.”

CDIB said in its lawsuit it has lost $228 million on the transaction and it has refused to pay Morgan Stanley’s most recent margin call of $12 million. It asked for compensatory and punitive damages to be determined, and for Morgan Stanley to be prevented from declaring it to be in default for the latest payment.

CDIB confirmed in an e-mailed statement today that it filed the claim and declined to comment further.

The case is China Development Industrial Bank v. Morgan Stanley, 65057/2010, New York state Supreme Court (Manhattan).

To contact the reporters on this story: Karen Freifeld in New York at; Weiyi Lim in Taipei at

To contact the editor responsible for this story: David E. Rovella at

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