Morgan Stanley has been sued by a Virgin Islands pension fund that accused the Wall Street bank of defrauding investors by marketing $1.2 billion of risky mortgage-related notes that it expected to fail.

The lawsuit filed Dec. 24 in Manhattan federal court said Morgan Stanley collaborated with credit rating agencies Moody’s Investors Service and Standard & Poor’s to obtain “triple-A” ratings for notes marketed in 2007 as part of a collateralized debt obligation known as Libertas.

According to the complaint, the CDO was backed by low-quality assets, including securities issued by subprime lenders New Century Financial, which quickly went bankrupt, and Option One Mortgage Corp, then owned by H&R Block.

The complaint alleged Morgan Stanley knew the CDO’s assets were far riskier than the ratings suggested, but was “highly motivated to defraud investors” with pristine ratings because it was simultaneously “shorting” almost all the assets. This was a bet that their value would fall, which they did in 2008.