Judge: Rating Agencies Must Defend Cheyne SIV Fraud Claims
03 September 2009 - 11:01AM
Dow Jones News
Two credit-rating agencies must defend a lawsuit over the
collapse of a $5.86 billion structured investment vehicle in 2007,
a federal judge has ruled, rejecting an argument that their ratings
are protected free speech.
In an order Wednesday, U.S. District Judge Shira Scheindlin in
Manhattan rejected an argument by rating firms Moody's Investors
Service and Standard & Poor's that their ratings of SIV
Portfolio PLC were protected by the First Amendment. SIV Portfolio
was better known by its former name, Cheyne Finance.
The judge, who partially dismissed the case, said ratings are
typically protected from liability, and subject to an actual malice
exception, because their ratings and reports are considered
"matters of public concern."
"However, where a rating agency has disseminated their ratings
to a select group of investors rather than to the public at large,
the rating agency is not afforded the same protection," the judge
said. "Here, plaintiffs have plainly alleged that the Cheyne SIV's
ratings were never widely disseminated, but were provided instead
in connection with a private placement to a select group of
investors."
Two institutional investors sued Morgan Stanley (MS), Bank of
New York Mellon Corp. (BK) and the two credit-rating agencies in
2008 in U.S. District Court in Manhattan.
On Wednesday, Judge Scheindlin dismissed all claims against Bank
of New York Mellon, but said Morgan Stanley and the rating agencies
must defend common-law fraud claims. She dismissed the remaining
claims against Morgan Stanley and the rating agencies.
The lawsuit alleged Morgan Stanley, at the time it sold Cheyne
assets to investors, failed to disclose that the assets backing the
Cheyne SIV were far riskier than represented.
The complaint, which is seeking class-action status, was brought
on behalf of persons seeking to recover losses from the liquidation
of notes issued by the structured investment vehicle between
October 2004 and October 2007.
Moody's Investors Service, a unit of Moody's Corp. (MCO), and
S&P, a unit of McGraw-Hill Cos. (MHP), allegedly provided
structuring and monitoring services, as well as "investment grade"
ratings to Cheyne's assets, according to the lawsuit.
Morgan Stanley, Moody's and S&P couldn't immediately be
reached for comment late Wednesday.
Cheyne Finance was set up and operated by London hedge fund
group Cheyne Capital Management (UK) LLP until its collapse in
September 2007. It changed its name to SIV Portfolio in November
2007, to reflect that Cheyne Capital was no longer involved.
-By Chad Bray, Dow Jones Newswires; 212-227-2017;
chad.bray@dowjones.com