The lawsuit, brought by hedge fund group Cambridge Place Investment Management (CIPM), centers around residential mortgage-backed securities (RMBS) in which CIPM had invested around $2.4bn. When the U.S. housing market began to collapse in 2006 and 2007, many of the RMBS, which were assembled by the banks, plummeted in value as many homeowners fell behind on their housing payments.

The lawsuit against Morgan Stanley, Goldman Sachs Group Inc. and about 10 other banks is one of the biggest cases of its kind to be filed so far in U.S. courts. The case cites a sizable number of so-called "confidential witnesses" quoted in the lawsuit, who said underwriting standards were abandoned in order to meet demands for mortgages from Wall Street.

Cambridge in 2007 closed its Caliber Global Investment Ltd, a fund that invested more than $900m in mortgage securities.

The Cambridge case was also brought against units of Credit Suisse AG, HSBC Plc, Barclays Plc, Royal Bank of Scotland Plc, Deutsche Bank AG, UBS AG, FBR Capital Markets Corp., Bank of America and GMAC LLC.

The case is Cambridge Place Investment Management Inc v Morgan Stanley & Co Inc et al, case No. 10-2741, in Suffolk Superior Court, Commonwealth of Massachusetts.