Officials in the US state of Massachusetts have accused Credit Suisse First Boston of purposely misleading investors.
The state's securities regulators filed a legal complaint alleging that CSFB issued biased research that was favourable to its clients.
The lawsuit accuses CSFB of using its investment-banking arm to control research, saying it knowingly disseminated biased stock research to curry favour with investment banking clients.
It said the bank also invested in companies that were newly listed on the stock market in order to artificially inflate the initial valuation of the stock. It further claimed that analysts were pressured not to downgrade a certain stock or talk negatively about a company.
The secretary of the Commonwealth of Massachusetts, William Galvin, has demanded the bank to pay a $1.9 million (SFr2.9 million) fine and that it separate its investment banking activities from its stock research.
He said the company displayed a cavalier attitude towards investors. "The level of deceit permeates the whole company," Galvin told reporters.
The lawsuit also seeks to bar CSFB analysts from marketing the bank's investment banking services and to bar analysts from covering any company for which the bank has provided investment-banking services within a year.
CSFB responded by saying that Galvin's accusations were "riddled with misleading statements and inaccuracies". The bank further claimed that Galvin's office refused to allow it to provide relevant information.
Galvin has come under pressure not to act alone against CSFB amid fears that unilateral action by one state could jeopardise industry-wide reforms being discussed by federal and state regulators.
However, Galvin, whose office has collected around 400,000 emails in its probe of CSFB, said he filed the complaint because the US Securities and Exchange Commission (SEC) had not done anything to investigate the matter.
"We're acting because the SEC has failed to act and self-policing has failed to protect the investors of the United States," he said.
The complaint could result in a hearing before an administrative law judge. CSFB can officially respond to the lawsuit within 21 days.
swissinfo with agencies
The lawsuit accuses CSFB of using its investment-banking arm to control research.
It says the bank also artificially inflated the value of IPOs.
The state has demanded that CSFB pay a fine of $1.9 million.
It also wants CSFb to separate its research and investment banking arms.