Ratings agencies Moody’s and Standard & Poor’s lost a bid for dismissal of fraud claims in a suit by investors who have claimed the companies falsely assigned inflated ratings to notes which were sold by Morgan Stanley and which were backed by subprime mortgages.
US District Judge Shira Scheindlin on Friday declined a request to throw out the fraud claims against the two firms and a claim of aiding and abetting fraud against banking group Morgan Stanley. Scheindlin narrowed the suit, dismissing claims by three of the 15 plaintiffs.
Scheindlin also dismissed the investors’ fraud claims against the bank and aiding-and-abetting claims against the rating companies, ruling that it was the rating companies, not Morgan Stanley, that issued the ratings.
The suit was filed in 2008 by institutional investors including Abu Dhabi Commercial Bank, based in the United Arab Emirates and Washington’s King County, which includes the city of Seattle, in a structured investment vehicle named Cheyne. The investors claim Morgan Stanley pressured the rating companies to give erroneous investment-grade ratings to the notes.
Scheindlin also on Friday ordered the investors to explain why their claims for negligent misrepresentation against the banking group Morgan Stanley and the rating companies should not be thrown out. Those claims were not part of the motion decided on Saturday.
“We’re pleased that the court, after examining the evidence, has recognized the value of our fraud claims against Morgan Stanley and the rating agencies,” said Daniel Drosman, a lawyer with the firm Robbins Geller Rudman & Dowd LLP who represents the investors.
The judge said the investors had offered sufficient evidence for a jury to consider whether the ratings were misleading when they were issued. She cited instant messages between two S&P analysts in which they discuss the Cheyne investment.
“That deal is ridiculous,” one analyst said, adding “We should not be rating it.”
“It could be structured by cows and we would rate it,” the first analyst replied.