Court Papers Undercut Ratings Agencies’ Defense

Documents in a civil suit in federal court appear to threaten a legal defense that credit ratings agencies have long used to fend off liability for misjudging securities that later cost investors vast sums in losses.

For years, the ratings agencies have contended that the grades they assign debt securities are independent opinions and therefore entitled to First Amendment protections, like those afforded journalists. But newly released documents in a class-action case in Federal District Court in Manhattan cast doubt on the independence of the two largest agencies, Moody’s Investors Service and Standard & Poor’s, in their work with a Wall Street firm on a debt deal that went bad as the credit crisis began.

The case, filed in 2008 by a group of 15 institutional investors against Morgan Stanley and the two agencies, involves a British-based debt issuer called Cheyne Finance. Cheyne was a structured investment vehicle, created in 2005, that raised $3.4 billion in short-term debt from investors. The company was meant to profit by purchasing longer-term obligations that generated more in interest than the company paid to its lenders.

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