* Investors sued over Cheyne debt vehicle
* Fraud claims against Morgan Stanley tossed out
* Morgan Stanley still faces aiding and abetting claims
* Judge may drop negligent misrepresentation claims
By Basil Katz
Aug 17 A Manhattan federal judge on Friday
refused to dismiss a lawsuit seeking to hold credit rating
agencies responsible for misleading investors about the safety
of a risky debt vehicle that they rated.
U.S. District Judge Shira Scheindlin denied a bid by Moody's
Investors Service and Standard & Poor's to dismiss the claims,
saying a jury could reasonably infer the agencies acted
fraudulently over their activities regarding the Cheyne
structured investment vehicle.
Friday's 89-page opinion also dismissed substantive fraud
claims against Morgan Stanley, which marketed the SIV,
but let stand claims the bank aided and abetted the alleged
"Morgan Stanley not only substantially assisted the rating
agencies in perpetrating a fraud, but actively encouraged them
to do so," the opinion said.
"Plaintiffs have offered evidence suggesting that despite
misgivings, Morgan Stanley manipulated the Cheyne SIV modeling
process to create the ratings it desired," the opinion said. The
bank "can be liable for aiding and abetting fraud, but not
Morgan Stanley spokeswoman Mary Claire Delaney declined to
In court papers, the rating agencies and the bank have
argued that there was no wrongdoing and that the ratings
constitute independent opinions by the agencies.
The Abu Dhabi Commercial Bank, King County in Washington
state, and a group of other investors had sued over losses they
claimed to suffer when Cheyne went bankrupt in August 2007.
The plaintiffs are seeking unspecified damages. The
plaintiffs say that by the time Cheyne collapsed it was worth
about $9 billion.
Friday's opinion kept in place 12 of the investors' claims
and tossed out three.
"We are pleased that the court dismissed several claims
against Standard & Poor's," said spokesman Edward Sweeney. S&P
is a unit of McGraw-Hill Cos. "We expect to prevail at
trial on the fraud claims."
Representatives for Moody's, a unit of Moody's Corp,
did not immediately return requests for comment.
The judge ruled that the "plaintiffs have also offered
sufficient evidence from which a reasonable jury could infer
that the rating agencies did not believe the ratings when they
The opinion quoted from an online conversation between S&P
employees in which one analyst tells another that "that deal is
Daniel Drosman, a lawyer for the plaintiffs, said they were
"pleased that the court, after examining the evidence, has
recognized the validity of our fraud claims against Morgan
Stanley and the rating agencies."
The judge also ordered the plaintiffs to file briefs by the
end of the month demonstrating why their negligent
misrepresentation claims against the rating agencies should stay
in place in light of a recent federal appeals court decision.
Sweeney, the S&P spokesman, said the agency believes those
claims should be tossed out.
The case is Abu Dhabi Commercial Bank et al v. Morgan
Stanley & Co et al, U.S. District Court, Southern District of
New York, No. 08-cv-07508.