Morgan Stanley can’t avoid liability for any inaccurate ratings on a group of notes backed by subprime mortgages by saying the information came from Moody’s Corp. and Standard & Poor’s, a judge ruled.
U.S. District Judge Shira Scheindlin in Manhattan said Oct. 5 that investors in a structured-investment vehicle named Cheyne may go forward with claims the bank is responsible for passing along inflated ratings on the notes.
The investors, which include Abu Dhabi Commercial Bank, claim Morgan Stanley was negligent in conveying ratings that it should have know were inaccurate. Scheindlin, applying New York law, rejected Morgan Stanley’s argument that the alleged misstatements were made by the rating companies, not the bank.
“Morgan Stanley’s conveyance of the inaccurate ratings -- combined with its omission of nonpublic facts that it knew would undercut the ratings -- represented a breach of its duty to provide plaintiffs with accurate information,” Scheindlin said in a written opinion.
In August, Scheindlin denied a request by Moody’s and Standard & Poor’s to dismiss fraud claims against them in the suit. She also allowed the investors to pursue claims of aiding and abetting fraud against Morgan Stanley.
Mary Claire Delaney, a spokeswoman for New York-based Morgan Stanley, declined to comment on the ruling.
At the time of her August decision, Scheindlin ordered the investors to provide arguments for why she shouldn’t dismiss the negligent-misrepresentation claim against Morgan Stanley.
“A defendant whose duty consisted of an obligation to provide accurate information to a plaintiff may be liable for negligently providing inaccurate information even if that information originated from third parties,” Scheindlin said in the Oct. 5 opinion.
The case is Abu Dhabi Commercial Bank v. Morgan Stanley & Co., 08-CV-7508, U.S. District Court, Southern District of New York (Manhattan).