Moody’s, S&P Lose Free-Speech Bid to End Fraud Suit

September 3, 2009
Joel Rosenblatt and David Glovin
© 2009 Bloomberg

A U.S. judge refused to dismiss a lawsuit against Moody’s Investors Service Inc. and Standard & Poor’s, rejecting arguments that investors can’t sue over deceptive ratings of private-placement notes because those opinions are protected by free-speech rights.

U.S. District Judge Shira Scheindlin in New York rejected the ratings firms’ arguments yesterday, forcing them and Morgan Stanley, which was also sued, to respond to fraud charges in a class-action by investors claiming the raters hid the risks of securities linked to subprime mortgages.

“It’s the first major ruling upholding fraud allegations against an arranger and the rating agencies on the instruments that are at the heart of the financial crisis,” said lawyer Patrick Daniels of Coughlin Stoia Geller Rudman Robbins LLP, the San Diego-based securities litigation firm that represented investors in the case.

“In previous cases,” Daniels said, “the ratings companies would hide behind First Amendment protection, saying they were merely reporting their opinion.”

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