Moody's, S&P settle lawsuits over debt vehicle ratings

The lawsuits had accused Moody's, S&P of misleading investors about safety of risky debt vehicles that they had rated

Moody's Investors Service and Standard & Poor's on Friday said they have settled two long-running lawsuits seeking to hold them responsible for misleading investors about the safety of risky debt vehicles that they had rated.

The lawsuits had accused Moody's, a unit of Moody's Corp , and S&P, a unit of McGraw-Hill Cos , of negligent misrepresentation over their activities regarding the Cheyne and Rhinebridge structured investment vehicles (SIVs).

Morgan Stanley , which marketed both SIVs and helped structure the Rhinebridge SIV, also settled.

Settlement terms were not disclosed in the cases, which had been brought in 2008 and had sought more than $700 million of damages. Both lawsuits were dismissed with prejudice, meaning they cannot be brought again.

Moody's spokesman Michael Adler, McGraw-Hill spokesman Jason Feuchtwanger and Morgan Stanley spokesman Mark Lake confirmed their companies' respective settlements.

"This settlement allows us to put the significant legal defense and related costs, as well as the distraction, of these very protracted litigations behind us," Adler said.

Feuchtwanger said McGraw-Hill's settlement involved no admission of wrongdoing.

Lawyers for the plaintiff investors did not immediately respond to several requests for comment.

A trial in the Cheyne case had been scheduled for May 6 before US District Judge Shira Scheindlin in Manhattan, who oversaw both lawsuits.

Credit rating agencies have been accused by investors, regulators and politicians of inflating the ratings of risky mortgage-backed and structured securities in a bid to win new business.

Critics said these activities also fueled demand from investors who believed the ratings were objective, but prices collapsed once the risks materialized, helping to trigger the 2008 global financial crisis.

S&P still faces the US Department of Justice's $5 billion civil fraud lawsuit filed in February over its ratings, the government's first major post-crisis action against a credit rating agency. The credit rating agency is trying to dismiss that case.

First amendment

In the Cheyne and Rhinebridge cases, investors accused rating agencies of collaborating with banks to ensure that SIVs received ratings as high as "triple-A," though much of the underlying collateral was low-quality or subprime mortgage debt.

The Abu Dhabi Commercial Bank, King County in Washington state, and other investors sought $638 million of damages related to losses they claimed to have suffered when the Cheyne SIV went bankrupt in August 2007. The similarly-named firm that managed the SIV did not go bankrupt.

King County and the Iowa Student Loan Liquidity Corp, meanwhile, had been seeking $70 million of damages over Rhinebridge, which had been structured by Germany's IKB Deutsche Industriebank AG and was wound down in August 2008.

IKB settled the Rhinebridge case last year, and credit rating agency Fitch Ratings, a unit of France's Fimalac SA , settled last month.

Among the defenses raised by the rating agencies were that their ratings were opinions that deserved free speech protection under the First Amendment to the US Constitution.

Scheindlin limited that defense in a 2009 ruling, saying that ratings on notes sold to select investors were not "matters of public concern" deserving broad free speech protection.

The government has not hit Moody's and Fitch with lawsuits similar to the case it is pursuing against S&P.

The cases are Abu Dhabi Commercial Bank et al v. Morgan Stanley & Co et al, U.S. District Court, Southern District of New York, No. 08-07508; and King County, Washington et al v. IKB Deutsche Industriebank AG et al in the same court, No. 09-08387.