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Abu Dhabi Commercial Bank v. Morgan Stanley & Co. Inc.

Case Summary

Plaintiffs Reach “Landmark” Settlement in Case Against Rating Agencies and Morgan Stanley

Once again, Robbins Geller has proven its ability to litigate a case against well-heeled corporate wrongdoers up to the eve of trial in order to maximize recovery for defrauded investors.

On April 26, 2013, plaintiffs inked what Reuters called “a landmark” settlement with the credit rating agencies, Standard & Poor’s and Moody’s, and Morgan Stanley stemming from fraudulent ratings assigned to bonds issued by the Cheyne Structured Investment Vehicles. Robbins Geller, on behalf of 14 individual plaintiffs, including Abu Dhabi Commercial Bank, Gulf International Bank, Commerzbank AG, King County, Washington and several other institutional investor clients, vigorously prosecuted the litigation for nearly 5 years before reaching the remarkable settlement 2 weeks before trial.

After being filed in 2008, the case heated up in September 2009 when Southern District of New York Judge Shira Scheindlin denied the rating agencies’ and Morgan Stanley’s motions to dismiss the action, rejecting the vaunted First Amendment defense the rating agencies previously enjoyed concerning their credit ratings. Judge Scheindlin found that because the ratings assigned to the Cheyne vehicle were the result of collaboration between the rating agencies and Morgan Stanley and because the Cheyne notes were sold to a limited group of qualified investors, the ratings were not protected speech immune from suit under the First Amendment.

Thereafter, Robbins Geller attorneys, led by partners Daniel S. Drosman and Luke O. Brooks and associate Darryl J. Alvarado, embarked on over two years of hard-fought discovery. Although the rating agencies and Morgan Stanley resisted producing documents at every turn, the Robbins Geller team pressed on, filing more than 30 motions to compel and obtaining reams of damning evidence.  Robbins Geller attorneys also took more than 30 depositions, many in London, where the Cheyne vehicle was rated by the credit rating agencies’ European divisions.

In August 2012, Robbins Geller notched another significant victory when Judge Scheindlin issued a landmark opinion denying the rating agencies’ and Morgan Stanley’s motions for summary judgment, clearing the way for a trial on the merits. In denying defendants’ motions, the court cited much of the substantial evidence of malfeasance by each of the defendants unearthed by Robbins Geller in discovery. For example, in an e-mail, a lead analyst for Moody’s observed that there was “no actual data backing the current model assumptions” on the Cheyne deal. Similarly, Standard & Poor’s chief credit officer for structured finance testified that the model used to rate Cheyne’s underlying assets was only marginally more accurate than “if you just simply flipped a coin.” Before the Cheyne SIV was created, a Standard & Poor’s analyst wrote in an e-mail: “I had difficulties explaining ‘HOW’ we got to those numbers since there is no science behind it.” Reuters emphasized that “through discovery, Robbins Geller uncovered hot documents – even more than the rating agencies produced to Congress – that helped investors withstand defense requests for summary judgment.”

Based on this and other evidence, Judge Scheindlin denied defendants’ summary judgment motions, finding that the rating agencies could not escape liability because evidence showed their ratings “both misstated the opinions or beliefs held by the Rating Agencies and were false or misleading with respect to the underlying subject matter they address.” She also found that Morgan Stanley was on the hook for aiding and abetting the rating agencies’ fraudulent conduct.

The Cheyne case is the only case alleging fraudulent ratings to overcome the rating agencies’ summary judgment motions, and the settlement amount reported by S&P is the largest amount ever paid by a rating agency to settle litigation.

Trial was set to commence in mid-May 2013. As reported in The Wall Street Journal, on April 26, 2013, the parties reached a confidential settlement – mere weeks before the Cheyne trial was set to commence.  Standard & Poor’s, one of three defendants in the case, publicly disclosed that its portion of the settlement payment was $77 million.

Reuters legal reporter Alison Frankel described the settlement as a “landmark” deal, emphasizing that it was the “first time S&P and Moody’s have settled accusations that investors were misled by their ratings.” Reuters further reported that the settlement is “unquestionably a great result for the [SIV] purchasers in the case and for their lawyers at Robbins Geller Rudman & Dowd, who have battled since 2008 to keep [the] fraud and negligence claims alive.  Unlike investors in more than three dozen other cases claiming the credit rating agencies facilitated the issue of toxic mortgage-backed securities, Abu Dhabi Bank, the Kings County pension fund and their fellow [SIV] purchasers survived preliminary motions, beating back the agencies’ argument that their ratings were opinions protected by the First Amendment,” Reuters explained.

According to Daniel S. Drosman, the lead partner on the litigation team, “The settlement with the rating agencies and Morgan Stanley is just another example of how a tenacious team of Robbins Geller attorneys, paralegals, and support staff dedicated their work to marshaling the evidence necessary to prove defendants’ liability, which led to a remarkable result for our 14 institutional investor clients. We were more than prepared to try this case, and our preparation and the strength of our case are reflected in the favorable settlements obtained for our clients.” The trial team at Robbins Geller responsible for bringing about the exceptional results consisted of partners Michael J. Dowd, Daniel S. Drosman, Luke O. Brooks, and Lucas F. Olts, associates Darryl J. Alvarado, Angel P. Lau, and Hillary B. Stakem, forensic account Andrew Rudolph, and a team of highly skilled and dedicated staff attorneys and support staff.

Abu Dhabi Commercial Bank v. Morgan Stanley & Co. Inc., No. 08-cv-07508 (S.D.N.Y.).

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