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Thursday, September 3, 2009

Lawsuits on SubPrime Begin

*looks like fall may be busy for lawyers afterall

M. Stanley, Moody's, S&P Must Defend Fraud Claims
Reuters via
A U.S. federal judge ruled that Morgan Stanley and two credit rating agencies must defend fraud charges in a class-action lawsuit accusing them of masking the risks of an investment linked to subprime mortgages, and which eventually collapsed. U.S. District Judge Shira Scheindlin on Wednesday rejected efforts to dismiss fraud claims brought by the plaintiffs, Abu Dhabi Commercial Bank and King County in Washington state.

She dismissed the plaintiffs' remaining claims, and all claims against a fourth defendant, Bank of New York Mellon [BK 27.95 --- UNCH (0) ], while granting permission for the plaintiffs to amend their complaint.

Scheindlin's ruling could affect other lawsuits brought by pension funds and other investors, seeking to hold banks and credit raters responsible for hyping the value of complex debt to win fees and causing investor losses as the debt collapsed.

The case concerned the Cheyne Structured Investment Vehicle (SIV), which went bankrupt in August 2007 after the quality of its assets plummeted. Many investors in Cheyne-related notes lost much or all of their investments.

SIVs are complex packages of loans and debt, including collateralized debt obligations, that once held some $350 billion of assets before falling out of favor.

The California Public Employees' Retirement System, the nation's largest public pension fund, in July sued Moody's, S&P and Fitch Ratings over losses on Cheyne and other SIVs.

In the New York case, the plaintiffs alleged that Morgan Stanley wrongly marketed Cheyne as a high-quality investment, and that the rating agencies assigned improperly high ratings.

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