Morgan Stanley has been accused of racial discrimination for packaging risky subprime loans made to African-Americans as investments.

According to a lawsuit filed by the American Civil Liberties Union, the National Consumer Law Center, the law firm of Lieff, Cabraser, Heimann & Bernstein and five borrowers from Detroit, Morgan Stanley funded subprime lender New Century and encouraged it to make high-risk loans in minority communities, particularly in Detroit.

The investment bank then sold the loans as securities, making short-term profits off mortgages that often led to foreclosures.

The ACLU says the litigation represents the first of its kind to directly make allegations against an investment bank, rather than a lender, of violating federal civil rights laws. Morgan Stanley stands accused of violating the 1968 Fair Housing Act, which prohibits unfair lending practices, and the 1974 Equal Credit Opportunity Act, which bans discrimination for credit transactions, including mortgages.

“The targeting of communities of color for loans that unfairly raises the risk of default and foreclosure is the quintessential ‘reverse-redlining’ outlawed by the Federal Fair Housing Act.” said Elizabeth J. Cabraser, a partner at Lieff, Cabraser, Heimann & Bernstein.

-Noel Brinkerhoff, David Wallechinsky

To Learn More:

Morgan Stanley Sued for Racial Discrimination in Pushing Predatory Loans to Black Homeowners (American Civil Liberties Union)

Adkins et al. vs. Morgan Stanley (American Civil Liberties Union)

ACLU Sues Morgan Stanley for Racial Bias over Mortgages (by Jed Horowitz, Reuters)