Fitch settles lawsuit over ratings of debt vehicle

NEW YORK, March 18 (Reuters) - The credit rating agency Fitch has agreed to settle a lawsuit by investors accusing it of fraudulently assigning its highest rating to a risky debt vehicle despite concern that the underlying home loans could have high default rates.

According to a filing made public Friday in the U.S. District Court in Manhattan, the settlement covers claims brought by King County, Washington and the Iowa Student Loan Liquidity Corp against Fitch, a unit of France’s Fimalac SA . Terms were not disclosed.

Fitch had been seeking to have U.S. District Judge Shira Scheinlin reconsider a January decision allowing claims of fraud against it and larger rivals Moody’s Investors Service and Standard & Poor’s to proceed.

“We are pleased with this settlement, and while we believe our recent motion to reconsider was extremely compelling we are content to put this matter behind us,” Daniel Noonan, a Fitch spokesman, said on Monday.

Daniel Drosman, a lawyer for the two plaintiffs at Robbins Geller Rudman & Dowd, confirmed the settlement but declined to disclose its terms.

“We’re satisfied with the resolution,” he said.

The 2009 lawsuit arose out of the October 2007 collapse of Rhinebridge Plc, a structured investment vehicle managed by the Germany’s IKB Deutsche Industriebank AG and structured by Morgan Stanley.

The investors accused the defendants of misrepresenting the risks of Rhinebridge, which had triple-A credit ratings despite its holding in subprime mortgage-backed assets.

Plaintiffs in the case are seeking $70 million of compensatory damages, Moody’s has said in a regulatory filing.

IKB had entered a confidential settlement with the investors in June 2012. The remaining defendants include Morgan Stanley, S&P parent McGraw Hill Cos and Moody’s Corp.

A separate case also naming Moody’s, S&P and Morgan Stanley is scheduled for a May 6 trial before the same judge over their roles with a different structured investment vehicle, known as Cheyne. Investors are seeking $638 million in damages in that case.

The cases are King County, Washington v. IKB Deutsche Industriebank AG et al, U.S. District Court, Southern District of New York, No. 09-8387, and Iowa Student Loan Liquidity Corp v. IKB Deutsche Industriebank AG et al in the same court, No. 09-8822.