Discover Financial Services alleges in a lawsuit that it was forced to accept a $2.75 billion legal settlement because its former parent, Morgan Stanley, held secret, unauthorized talks with Visa Inc. and MasterCard Inc.

Morgan Stanley, which spun off Discover last year, is expecting $1.2 billion out of the settlement of the antitrust suit that Discover brought in 2004 against Visa and MasterCard. Announcing the settlement this October, Discover said Morgan Stanley had breached their agreement and was not entitled to share the money.

In response to a lawsuit brought by Morgan Stanley in New York State Supreme Court in Manhattan, Discover now says its former parent held secret talks with Visa and MasterCard before a trial was scheduled to begin and upended Discover's legal strategy.

"Morgan Stanley's inappropriate communications and side deals with Visa and MasterCard undermined Discover's litigation strategy and harmed its settlement terms," Discover said Thursday.

Mark Lake, a spokesman for Morgan Stanley, said, "There is absolutely no basis for Discover's claim that the agreement was breached." The investment bank "is due to receive approximately $1.2 billion pretax."

Visa and MasterCard are not parties to the dispute between Morgan Stanley and Discover.

In its Nov. 17 counterclaim in Morgan Stanley's lawsuit, Discover says the investment bank reached a tentative $700 million deal with MasterCard and Visa shortly before the spinoff. Visa ultimately rejected the deal. Its share of the settlement announced two months ago was about $1.89 billion.

Discover says it did not learn until Oct. 13, the day before trial, that Morgan Stanley had secretly resumed talks with Visa and MasterCard. At that point, Morgan Stanley and Discover were split on whether to accept a mediator's $2.75 billion settlement proposal, Discover said.

Morgan Stanley wanted to accept the proposal because its potential recovery in the case was capped at $1.5 billion under a contract with Discover. Discover was hesitant because it was seeking damages that could have reached $18 billion, after being tripled under antitrust law, according to the claim.

Morgan Stanley's actions forced Discover to choose between accepting the $2.75 billion proposal, while "risking the possibility that Visa and MasterCard would not accept it" after their talks with Morgan Stanley, or "risking a trial without knowing whether its privileged and confidential information had been disclosed to its opponents," the card company said.

Discover said it felt compelled to settle. It is seeking unspecified damages and an order declaring it is not required to pay $1.2 billion to Morgan Stanley.

Morgan Stanley says in its complaint that Visa approached it.

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