Morgan Stanley sued by Taiwan's CDIB on mortgage deal

Taiwan's China Development Industrial Bank (CDIB) has sued Morgan Stanley in a US court to recover millions of dollars in losses it suffered from its investment in a residential mortgage product.

"Morgan Stanley made bad investments tied to US subprime mortgage bonds and then dumped its toxic investments on it," CDIB's lawyers said in a statement on Tuesday.

The case was filed by CDIB in the New York County Supreme Court in July and the Taiwan bank's lawyers issued a public statement regarding this on Tuesday evening.

In a statement to the Wall Street Journal, a Morgan Stanley spokesman denied CDIB's allegations that the Taiwanese bank suffered losses of more than $250 million from subprime-mortgage investments that the securities firm suggested were ultra-safe.

"We believe these allegations are wholly without merit and intend to defend ourselves vigorously," the Morgan Stanley spokesman told the Journal.

The mortgage product at the heart of this case -- known as STACK 2006-1 collateralised debt obligation -- was a synthetic derivative product tied to the performance of residential mortgage-backed securities.

"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, the lead counsel for CDIB, said in the  statement.

The complaint states that the STACK CDO was initially created in August 2006 by Morgan Stanley, and it was sold to CDIB in April 2007.

After the sale happened, Morgan Stanley began making collateral calls seeking millions of dollars in payments from CDIB, CDIB lawyers said.

Morgan Stanley could not immediately be reached for comment by Reuters outside regular US business hours.