Court Rejects Rating Agencies' Argument that Credit Crisis Alone Caused Investor Losses

Court Rejects Rating Agencies' Argument that Credit Crisis Alone Caused Investor Losses

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.

Background

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.