Eric Schneiderman, attorney general of New York. Photographer: Louis Lanzano/Bloomberg

(Bloomberg) — Credit Suisse Group AG was ordered to face a $10 billion lawsuit by New York’s attorney general accusing the Swiss bank of fraud in the sales of mortgage-backed securities before the 2008 financial crisis.

A New York State Supreme Court justice rejected the bank’s request to dismiss the case, a move that gives leverage to Attorney General Eric Schneiderman to demand internal bank documents and force a settlement. New York demonstrated the bank may have engaged in misconduct, Justice Marcy Friedman said in a Dec. 24 decision, allowing the suit to head toward trial.

In addition to forcing Zurich-based Credit Suisse to defend itself or settle, the ruling may strengthen Schneiderman’s hand in punishing other banks for bad behavior tied to the recession.

Elizabeth DeBold, a spokeswoman for Schneiderman, said the lawsuit is part of an effort to pursue “accountability for those who contributed to the near collapse of our economy.” Drew Benson, a spokesman for Credit Suisse, said yesterday in an e-mail that the bank will appeal the ruling.

New York sued Credit Suisse in November 2012, claiming Switzerland’s second-largest bank misrepresented the risks of investing in mortgage-backed securities. Last year, the bank argued that New York missed a three-year deadline for suing. The state countered that it had six years to file its complaint.

If the bank had won, Schneiderman would have faced a new roadblock as he considers similar multibillion-dollar claims against Wall Street firms.

Armed with the Martin Act, New York’s powerful anti-fraud statute, Schneiderman has pursued banks while introducing programs to relieve struggling homeowners and stem a rise in foreclosures. He claimed Credit Suisse knew about “pervasive flaws” in the screening of residential loans underlying mortgage securities it sold, but assured investors they were safe because it wanted to expand its business.

Under the Martin Act, “false promises” by sellers of securities are against the law.

Earlier Settlements

JPMorgan Chase & Co. also sued by Schneiderman’s office, agreed to settle that case along with federal claims over mortgage-backed securities in a landmark $13 billion accord last year. The state got $613 million in the settlement, the first in a string of payouts it has received in legal agreements over the financial instruments.

In July, Citigroup Inc. agreed to pay $7 billion in fines and consumer relief to resolve claims by the federal government and states including New York. The following month, Bank of America Corp. agreed to pay about $17 billion, including almost $10 billion in cash, to resolve civil investigations by federal and state prosecutors, including Schneiderman.

Warning Signs

In New York’s suit against Credit Suisse, Schneiderman claimed the bank ignored warning signs about the quality of loans it was packaging and selling. One example cited was its use of New Century Financial Corp. mortgages after that firm’s 2007 bankruptcy.

The case is People of the State of New York v. Credit Suisse Securities (USA) LLC, 451802-2012, New York State Supreme Court, New York County (Manhattan).

To contact the reporters on this story: Linda Sandler in New York at lsandler@bloomberg.net ; Christie Smythe in federal court in Brooklyn, New York at

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net ; Andrew Dunn at adunn8@bloomberg.net David E. Rovella, Joe Schneider