Morgan Stanley, Moody's, S&P must defend fraud claims

NEW YORK Wed Sep 2, 2009 7:25pm EDT

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NEW YORK (Reuters) - A U.S. federal judge has ruled that Morgan Stanley (MS.N) and two credit rating agencies must defend part of a class-action lawsuit over losses on a fund that collapsed during the credit crisis.

U.S. District Judge Shira Scheindlin on Wednesday rejected efforts by Morgan Stanley, Moody's Corp's (MCO.N) Moody's Investors Service and McGraw-Hill Cos' MHP.N Standard & Poor's to dismiss fraud claims brought by the plaintiffs, Abu Dhabi Commercial Bank and King County in Washington state.

She dismissed the remaining claims against those entities, as well as all claims against Bank of New York Mellon Corp (BK.N). The judge will allow the plaintiffs to amend their complaint, and set an Oct 1 status conference.

The lawsuit accused the defendants of marketing a complex instrument, the Cheyne Structured Investment Vehicle, as a high-quality investment, but masked the risks.

SIVs once held some $350 billion in assets, but many collapsed. According to its complaint, the Abu Dhabi bank lost its entire investment in the Cheyne vehicle.

The case is Abu Dhabi Commercial Bank v. Morgan Stanley, U.S. District Court, Southern District of New York (Manhattan), No. 08-7508.

(Reporting by Jonathan Stempel, editing by Leslie Gevirtz)

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