Moody's, S&P free speech case narrowed by U.S. judge

NEW YORK (Reuters) - A Manhattan federal judge has rejected an attempt by investors suing Moody's Corp and McGraw-Hill Cos Inc to add non-fraud claims to a closely watched case over whether credit rating agencies deserve free speech protection for their opinions.

The ruling by U.S. District Judge Shira Scheindlin last Thursday does not affect fraud claims accusing Moody's Investors Service and McGraw-Hill's Standard & Poor's unit of making false and misleading statements about securities backed by subprime mortgages and other debt. Morgan Stanley, which marketed the securities, also faces fraud allegations.

The case involved losses that Abu Dhabi Commercial Bank and King County in Washington state, which includes Seattle, said they suffered from the Cheyne Structured Investment Vehicle, which went bankrupt in August 2007.

Scheindlin's September 2 decision letting the fraud claims stand was seen as an aid to lawsuits by pension funds and other investors seeking to hold banks and credit raters responsible for inflating the value and safety of debt in order to win fees, and in doing so fueling the global financial crisis.

The judge ruled at the time that credit raters do not deserve the broadest First Amendment protection when they distribute ratings to "a select group of investors" rather than the public at large. She said a rater's opinion could be subject to challenge "if the speaker does not genuinely and reasonably believe it or if it is without basis in fact."

Scheindlin gave the plaintiffs permission to amend their complaint and add contract claims, but in Thursday's ruling said they "added no new facts and made no attempt to cure the deficiencies outlined by this court."

She also declined to permanently dismiss claims against another defendant, Bank of New York Mellon Corp, saying new facts could surface in the discovery process.

In her earlier ruling, Scheindlin said Cheyne issued notes with ratings as high as "triple-A" and the credit raters were paid above-normal fees in part "contingent upon the receipt of desired ratings."

The judge did not decide the case's merits in her rulings.

"We are clearly pleased that Judge Scheindlin continues to express support for the case and the allegations that we have made thus far, and look forward to proving our case and preparing for trial," Patrick Daniels, a partner at Coughlin Stoia Geller Rudman & Robbins LLP in San Diego, which represents investors, said on Monday.

McGraw-Hill spokesman Steven Weiss said his company is "confident that when the court considers more than the plaintiffs' baseless allegations, it will be apparent that the facts do not support the fraud claim."

Morgan Stanley spokeswoman Jennifer Sala declined to comment. A Bank of New York Mellon spokesman had no immediate comment. A Moody's spokesman did not return a call seeking comment. Those three companies, as well as McGraw-Hill, are based in New York.

In Monday trading, Moody's shares fell 2 cents to $24 and McGraw-Hill rose 96 cents to $30.54.

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

(Reporting by Jonathan Stempel; editing by Andre Grenon and Steve Orlofsky)