In a April 26, 2010 opinion (here) that could have
significant implications for motions to dismiss in the many subprime-related securities
actions pending against the rating agencies, Southern District of New York Judge
Schira Scheindlin rejected
the arguments of Moody's and S&P that the action investors in the Rhinebridge
structured investment vehicle (SIV) should be dismissed because the investors' losses
were caused the global credit crisis rather than those firms' investment ratings.
The investor plaintiffs had filed a putative
class action lawsuit for common law fraud in connection with the collapse of Rhinebridge.
The action was brought against IKB Deutsche Industriebank
AG and related entities; the rating agency defendants, including Moody's and
S&P; and certain individuals. (If IKB's name sounds familiar, that is because
it was one of the principal buyers in the now infamous Abacus transaction at the
heart of the SEC's action
against Goldman Sachs.)
The plaintiffs contend that the defendants
fraudulently misrepresented the value of Rhinbridge and its Senior Notes. These
misrepresentations took the form of the high credit ratings assigned to the Notes.
The Notes' triple A ratings allegedly conveyed to investors that they were highly
credit worthy and exceptionally strong, but also allegedly concealed that Rhinebridge's
portfolio actually consisted of toxic assets that were heavily concentrated in the
structured finance and subprime mortgage industries. The Notes were downgraded in
October, Rhinebridge entered receivership and the investors lost million of dollars.
S&P and Moody's moved to dismiss
on the grounds that plaintiffs allegations were insufficient to demonstrate loss
causation, in that they failed to account for the global liquidity crisis that began
in the summer of 2007.
Read the Court Rejects Rating Agencies' Argument that Credit Crisis Alone
Caused Investor Losses at D&O
Diary, a blog by Kevin LaCroix.