There's no direct link between Morgan Stanley and reverse redlining in the new Manhattan federal court class action complaint accusing the bank of housing discrimination. The American Civil Liberties Union and the National Consumer Law Center, which are representing a potential class of African-Americans in the Detroit metro area who took out subprime loans from the bankrupt lender New Century, doesn't offer a shred of evidence that anyone at Morgan Stanley believed New Century's mortgage lending practices targeted African-Americans for loans they couldn't afford. By the complaint's own allegations, all Morgan Stanley wanted -- and wanted desperately -- was a steady stream of subprime New Century loans to securitize. There's nothing to indicate that Morgan Stanley knew or cared that New Century was allegedly 70 percent more likely to write subprime loans for African-Americans than for whites in the Detroit area.

But according to Stuart Rossman of the National Consumer Law Center, none of that matters. Under the federal Equal Credit Opportunity and Fair Housing laws the class is asserting, the question isn't what Morgan Stanley intended or even knew. It's whether the bank's insatiable appetite for mortgages originated by the notorious New Century resulted in a disparate impact on African-Americans. The class alleges that by buying up New Century mortgages and even providing financing when New Century began to run into problems, Morgan Stanley effectively encouraged the mortgage originator to target African-Americans for mortgages they couldn't afford. "Morgan Stanley never checked the impact of its policies," Rossman told me Tuesday. "They were reckless. They didn't know and they didn't care."

I should note here that Morgan Stanley has said the allegations are "completely without merit," and several defense lawyers told Reuters Monday that the case is a stretch. "If New Century discriminated, then New Century belongs there," John Ropiequet of Armstein & Lehr told Reuters. "I could see a judge taking a hard look and saying, 'I don't think it's fair.'" And even if the class prevails, Rossman told me, Morgan Stanley will hardly feel much pain, at least financially. The only money the complaint seeks is disgorgement of the bank's fees for securitizing between 5,000 and 6,000 New Century subprime loans to African-Americans in the Detroit area. Given the volume of loans in underlying Morgan Stanley securitization pools, that's peanuts.

Nevertheless, this is a shrewdly drafted complaint, and Morgan Stanley (and the other banks that securitized subprime mortgages) shouldn't underestimate it. To begin with, the ACLU and Rossman's group chose their target wisely. Morgan Stanley was the biggest securitizer of loans originated by New Century, which was the mortgage lender whose loans were most likely to default. (That's until New Century went bankrupt in 2007.) The bank has already shouldered responsibility for New Century's deficient underwriting in a $102 million settlement with Massachusetts regulators in 2010. And New Century's lending practices have been thoroughly scrutinized, thanks in part to the examiner appointed in its Chapter 11.

The case is also carefully tailored to assert claims only on behalf of Detroit-area African-Americans with New Century mortgages. Because the Detroit area is so segregated, the class alleges, when New Century targeted borrowers in particular communities, the originator was effectively targeting African-Americans. As a result, the class was able to offer a wealth of statistics to support its allegations that New Century's lending practices -- which were supposedly encouraged by Morgan Stanley's policies -- had an unequal impact on African-American borrowers.

Finally, the complaint demands very particular relief. There's no demand for money damages, which would raise all sorts of class certification defenses under Wal-Mart v. Dukes. Instead, the complaint requests what's known as "issue certification," asking for the court to rule that Morgan Stanley's policies and procedures violate the fair housing and equal credit laws (as well as a Michigan civil rights law). The class also asks for certification as an injunctive class. But that's a lower bar for certification than class members would face if they wanted class-wide damages.

I'm certainly not saying that the case against Morgan Stanley is a sure thing. Rossman and his co-counsel (including Elizabeth Cabraser of Lieff Cabraser Heimann & Bernstein) even said at a press conference Monday that the case asserts a novel legal theory, and disparate impact cases, which often devolve into statistical shouting matches, are notoriously hard to prove. You can be sure that the entire securitization industry will be rooting for Morgan Stanley to squash this one, particularly because the ACLU and Rossman's group have flat-out said that this is a test case, and if they win, they'll assert similar claims against other players.

And winning, for the class and its lawyers, is relative, Rossman told me. It won't take millions of dollars of disgorgement, he said, but simply an acknowledgement that banks and securitization players have to remember that their policies affect real people, so those policies have to be non-discriminatory. "If we get that," Rossman said, "we will have achieved a major victory."

(Reporting by Alison Frankel)

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