Abu Dhabi Commercial Bank Co. v. Morgan Stanley & Co., Inc., No. 08 Civ. 7508, 2009 U.S. Dist. LEXIS 79607 (S.D.N.Y. Sept. 2, 2009)

• Author: Matt Ribe
• Pages: 08

Page 59

On September 2, 2009, the United States District Court for the Southern District of New York issued a ruling refusing in part a defendant's motion to dismiss a suit brought against rating agencies and financial institutions. This ruling is significant because it represents one of the first times that a court has refused to uphold First Amendment protections for ratings assigned to investment products by rating agencies, thereby potentially holding the agencies responsible for losses suffered by investors when the rated investments failed.

In 2004, institutional investor plaintiffs Abu Dhabi Commercial Bank (Abu Dhabi) and King County, Washington State purchased Structured Investment Vehicles (SIVs) packaged, sold and rated by the defendant companies Morgan Stanley & Co., Inc (Morgan Stanley); two rating agencies—Moody's and Standard & Poor's; and other companies. The plaintiffs' suit included claims for common law fraud, negligent misrepresentation, breach of fiduciary duty and contract, and unjust enrichment.

Among other allegations, the plaintiffs alleged that the defendants worked together to package and sell the SIVs and that the defendants knew that the ratings assigned to the SIVs were false and misleading. SIVs are particularly dependent upon high ratings from rating agencies because not only is the investment vehicle itself assigned a credit rating which is supposed to convey to investors its overall creditworthiness, but the collateral assets underlying the SIV are also given credit ratings by the agencies. The plaintiffs alleged that the defendants knew that the SIVs underlying capital, partially comprised of residential mortgage backed securities, and did not war-Page 60rant the high credit ratings the vehicles received. Finally, the plaintiffs alleged that the rating agencies were offered extra compensation to assign such high ratings to the SIVs. The defendants moved to dismiss all of the claims filed against them for failure to state a claim for which relief could be granted.

This case is one of many being filed against rating agencies for their role in structuring and rating SIVs for institutional investors.¹ Some of these cases depend on whether the ratings assigned to the SIVs are protected opinions under the First Amendment. Here, the court held that while under normal circumstances (excepting cases of actual malice) rating agencies are protected under the First Amendment,² the situation was different. When the...