Reuters: Regulatory News: NY judge won't dismiss lawsuits vs Moody's, S&P

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NY judge won't dismiss lawsuits vs Moody's, S&P May 7th 2012, 21:48 Mon May 7, 2012 5:48pm EDT * Negligent misrepresentations survive * Investors sued over Cheyne, Rhinebridge debt vehicles * Morgan Stanley, IKB also sued By Jonathan Stempel May 7 (Reuters) - A Manhattan federal judge narrowed but refused to dismiss two lawsuits seeking to hold credit rating agencies responsible for misleading investors about the safety of two risky debt vehicles that they rated. U.S. District Judge Shira Scheindlin refused to dismiss claims accusing Moody's Investors Service and Standard & Poor's of negligent misrepresentation over their activities regarding the Cheyne and Rhinebridge structured investment vehicles. She also dismissed claims alleging aiding and abetting fraud, breach of fiduciary duty and negligence. A third rating agency, Fitch, is also a defendant in the Rhinebridge case. Moody's is a unit of Moody's Corp, S&P is a unit of McGraw-Hill Cos, and Fitch is a unit of France's Fimalac SA. Scheindlin's decisions were issued on Friday and made public on Monday. The Abu Dhabi Commercial Bank, King County in Washington state, and other investors had sued over losses they claimed to suffer when Cheyne went bankrupt in August 2007. King County and the Iowa Student Loan Liquidity Corp sued over alleged losses in Rhinebridge, which was wound down in August 2008. Scheindlin also ordered Morgan Stanley, which marketed both SIVs and helped structure the Rhinebridge SIV, and IKB Deutsche Industriebank AG, which helped structure the Rhinebridge SIV, to face negligent misrepresentation claims. Moody's spokesman Tony Mirenda said it believes the cases are without merit, and that the remaining claims against it will be dismissed. Fitch spokesman Daniel Noonan said that agency will continue to defend itself in the Rhinebridge case. Morgan Stanley spokeswoman Mary Claire Delaney declined to comment. S&P spokesman John Piecuch had no immediate comment. Lawyers for IKB and for the plaintiffs did not immediately respond to requests for comment. In the Rhinebridge decision, whose reasoning applied to the Cheyne decision, Scheindlin said the plaintiffs sufficiently showed that they and the rating agencies had the "special relationship" required under New York law to allow the negligent misrepresentation claims to proceed. "The rating agencies (1) intended that their ratings would be used to evaluate the SIV; (2) intended that the plaintiffs -- members of a select group of qualified investors -- would rely on their ratings to evaluate the SIV; and (3) prepared their ratings with the end and aim of inducing investors such as the plaintiffs to invest in the SIV," Scheindlin wrote, summarizing the allegations. In both cases, investors accused the rating agencies of collaborating with the banks in arranging for SIVs to receive ratings as high as "triple-A," even though much of the underlying collateral was low-quality or subprime mortgage debt. The cases are Abu Dhabi Commercial Bank et al v. Morgan Stanley & Co et al, U.S. District Court, Southern District of New York, No. 08-07508; and King County, Washington et al v. IKB Deutsche Industriebank AG et al in the same court, No. 09-08387. Link this Share this Digg this Email Reprints

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