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OPINION

Rating agencies: An end to free speech?

Ratings agencies may not use the First Amendment to protect themselves but they still won’t be successfully sued over every structured credit opinion.

The fact that a US judge did not dismiss a case brought against two ratings agencies and a bank involved in the failed Cheyne SIV (which collapsed in October 2007) has raised the prospect of a wave of fraud allegations to come from the legion of disgruntled structured credit investors whose stakes in these deals have been wiped out over the past two years. The case was brought by two institutional investors, Abu Dhabi Commercial Bank and King County, which filed 32 claims of common-law fraud, negligent misrepresentation, negligence, breach of fiduciary duty, breach of contract, unjust enrichment and aiding and abetting against Moody’s and Standard & Poor’s together with Morgan Stanley and BoNY Mellon (the case against BoNY Mellon was thrown out in its entirety).

The judge ruled that the First Amendment (the right to free speech) could not provide a defence in this case because the ratings opinions were distributed privately to a select group of investors and not to the general public. But there are aspects of the ratings agencies’ and Morgan Stanley’s involvement in the deal that merit closer scrutiny.

The lawsuit claims that the role of the ratings agencies in the Cheyne SIV was more integral than is typically the case: they worked directly with Morgan Stanley to structure the notes in such a way that the required ratings were achievable and their compensation was contingent on receipt of the desired ratings.

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