Morgan Stanley, Raters Must Face Fraud Charges

New York, NY (AHN) – Investment firm Morgan Stanley & Co. and two ratings agencies must face fraud allegations that they gave overly favorable ratings of a firm that later became one of the first to crash in the credit crisis.

Judge Shira A. Scheindlin of U.S. District Court for the Southern District of New York rejected arguments by Morgan Stanley, Moody’s Investors Service Inc. and Standard & Poor’s Rating Services that their reports were protected by the First Amendment.

The banks and ratings firms had provided investment advice to Abu Dhabi Commercial Bank and King County, WA, about purchases of notes issued by Cheyne Finance LLC between October 2004 and October 2007. Abu Dhabi and King County sued after Coyne collapsed in August 2007 and sent parent company Cheyne Finance PLC into receivership.

Cheyne had been one of the largest structured investment vehicles on the market.

According to the suit, the defendants claimed Cheyne’s financial instruments to be highly rated and safe investments when the instruments actually concealed embedded risks that caused their value to drop steeply as the mortgage market collapsed.

The banks and ratings agencies knew that the assumptions and models they used to rate the instruments were flawed, the suit contends, but never told investors.

The California Public Employees Retirement System sued Moody’s, S&P and Fitch Inc. in July on the grounds that they rated Cheyne and other SIVs excessively high, causing the pension fund to lose up to $1 billion.

The ratings firms had argued their advice was protected by the First Amendment because they were merely reporting their opinions.

The judge dismissed 10 other allegations against the firms, as well as all claims against another defendant, Bank of New York Mellon.

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