Update: Citing an anonymous source, The Wall Street Journal reported late Monday that the combined settlement tab for Moody’s, S&P, and Morgan Stanley is $225 million. We couldn’t immediately confirm the figure.
Nearly four years after a federal judge in Manhattan rejected their usually-reliable First Amendment defense, Moody’s Investors Service and Standard & Poor’s on Friday settled separate lawsuits accusing them of misleading investors in a pair of ill-fated structured investment vehicles backed by subprime mortgage debt.
In filings with U.S. District Judge Shira Scheindlin, investor-plaintiffs that bought notes in the SIVs agreed to dismiss suits against the credit rating agencies and co-defendant Morgan Stanley & Co., which marketed the investments. The first suit, which involved a SIV called Cheyne Finance, was filed in 2008 with the Abu Dhabi Commercial Bank acting as lead plaintiff. A second case, over a SIV called Rhinebridge, was filed against the same defendants in 2009, this time with King County, Washington as the lead plaintiff.
Terms of the settlements were not disclosed. Scheindlin refused to dismiss fraud claims against the Cheyne defendants in May 2012. Trial in that case was set to begin next month. In January she ruled that the plaintiffs could also proceed to trial against the defendants in the Rhinebridge matter.
Robbins Geller Rudman & Dowd represented all but one of the plaintiffs. (Pomerantz Grossman Hufford Dahlstrom & Gross represented the State Board of Administration of Florida.) The defendants had Davis Polk & Wardwell (for Morgan Stanley); Gibson, Dunn & Crutcher and Satterlee Stephens Burke & Burke (for Moodys); and Cahill Gordon & Reindel (for S&P and parent company The McGraw-Hill Companies).
The litigation dates all the way back to the collapse of the $5.86 billion Cheyne Finance SIV in August 2007. Rhinebridge, which was valued at nearly $2 billion, failed in October 2007, with Moodys and S&P downgrading its notes to junk status. The plaintiffs alleged that S&P and Moodys had originally given the Cheyne and Rhinebridge notes top ratings despite knowing that they were extremely risky. S&P and Moodys, countered that their ratings were opinions that were protected under the First Amendment. Scheindlin, however, ruled in 2009 that the First Amendment protection didn’t apply because the ratings were only given to a small, select group of investors, not to the public at large.
Robbins Geller partners Luke Brooks and Daniel Drosman said in an email that the settlement "was a good result for our clients."
Davis Polk’s James Rouhandeh, who represented Morgan Stanley, did not respond to a request for comment. Moody’s lawyers Mark Kirsch of Gibson Dunn and Joshua Rubins of Satterlee Stephens referred requests for comment to their client, as did Floyd Abrams of Cahill Gordon, who represents S&P.
"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. We are satisfied that it is in the best interests of our company and shareholders," Moody’s said in a statement. A spokesperson for S&P said that the settlement contained no admission of wrongdoing or liability by the agency.
