Most efforts to hold ratings agencies liable for the financial crisis have failed, but on Thursday two institutional investors got the green light to proceed with claims that ratings agencies misled them about a $1.1 billion structured investment vehicle called Rhinebridge Plc. The plaintiffs will also be able bring claims against Morgan Stanley, which structured and marketed Rhinebridge, although not as many claims as they would have liked.
In this 26-page summary judgment ruling, U.S. District Judge Shira Scheindlin ruled that the two institutional investors—The Iowa Student Loan Liquidity Corp. and King County, Washington—can go to trial with fraud claims against Moody’s Corp., Fitch Ratings Inc., and Standard & Poor’s Financial Services LLC, which all gave Rhinebridge their top rating. In addition, Scheindlin ruled that the investors can seek to hold Morgan Stanley liable for aiding and abetting the rating agencies’ alleged fraud.
The plaintiffs invested in Rhinebridge in July 2007, amid the start of the financial crisis. The SIV collapsed a month later. Daniel Drosman and Luke Brooks of Robbins Geller Rudman & Dowd brought suit on behalf of the two funds in 2009, alleging that Morgan Stanley and the ratings agencies knew the SIV was doomed and lied about it. Robbins Geller also sued Morgan Stanley, Moody’s, and S&P over a $5.86 billion SIV called Cheyne Finance Plc that collapsed in similar fashion. (Fitch wasn’t named in that case, because it never rated Cheyne.) Robbins Geller brought the Cheyne case on behalf of 15 investors, including Abu Dhabi Commercial Bank.
The ratings agencies moved to dismiss the Rhinebridge and Cheyne cases on First Amendment grounds. They argued that ratings are opinions, not statements of fact, and therefore constitute free speech. Most judges have accepted that argument, but Scheindlin ruled in September 2009 that First Amendment protection does not apply when a “rating agency has disseminated their ratings to a select group of investors rather than to the public at large,” as Robbins Geller’s clients allege. (See our coverage of that ruling here.)
The defense lawyers—which include Cahill Gordon & Reindel for S&P and Paul Weiss Rifkind Wharton & Garrison for Fitch—regrouped and tried to get both cases tossed on summary judgment. They argued that even if their clients aren’t shielded by the First Amendment, the investor plaintiffs still can’t win because the ratings agencies believed their ratings were accurate at the time they made them. 
Scheindlin denied the motions for summary judgment in the Cheyne case in August. As we reported here, she noted that the plaintiffs had cobbled together sufficient evidence from which a jury could find that the rating agencies’ own analysts didn’t believe their ratings. She pointed to internal emails produced during discovery, including one in which one S&P analyst wrote that “it could be structured by cows and we would rate it.” (The Cheyne case is scheduled to go to trial in May.)
Scheindlin has now reached a similar conclusion in the Rhinebridge case. Looking at the evidence against Moody’s, she wrote that “plaintiffs provide a litany of emails, deposition quotes, and internal documents indicating an awareness that the rating model was unsupported and a concern with the state of Residential Mortgage Backed Securities market.” With regards to S&P, the judge said that “plaintiffs have offered evidence that S&P was even more concerned about the state of the RMBS market when it rated Rhinebridge than when it rated Cheyne two years earlier.”
Thursday’s ruling wasn’t a total win for the plaintiffs, however. Scheindlin ruled that the rating agencies can’t be held liable for aiding and abetting fraud, because “plaintiffs have offered no evidence that any of the Rating Agency defendants knew what the other Rating Agency defendants were doing.” She also dismissed fraud claims against Morgan Stanley, on the grounds that “no actionable misstatement can be attributed to them.” She additionally tossed negligent misrepresentation claims against Morgan Stanley, ruling that the plaintiffs failed to show that they had the sort of “special relationship” with the bank that gives rise to a duty to make no negligent misrepresentation. The judge has similarly limited the Cheyne case in recent months, so Thursday’s rulings didn’t come as a surprise.
Cahill Gordon partner Dean Ringel, who represents S&P, did not immediately respond to a request for comment. Paul Weiss partner Martin Flumenbaum, who represents Fitch, was not available for comment. Drosman of Robbins Geller declined to comment.