The lawsuit, which seeks class-action status, was filed Monday by the American Civil Liberties Union and others on behalf of five Detroit residents and Michigan Legal Services. It was filed in U.S. District Court in New York.
The five homeowners in the lawsuit received their loans from subprime lender New Century Mortgage Corp., which has since collapsed.
The lawsuit claims Morgan Stanley pushed New Century to issue certain types of loans with no concern about risk, because it made its profit at the outset when the investment bank bundled the loans into securities and sold them.
"With this lawsuit, real victims of the subprime lending scandal are stepping forward to hold investment banks like Morgan Stanley accountable for the devastation the banks wrought in their lives and in our economy," ACLU Executive Director Anthony D. Romero said in a statement.
An email was sent to Morgan Stanley seeking comment but there was no immediate response.
Shares of Morgan Stanley added 25 cents to $17.56 in morning trading on Monday.
