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Credit Rating Agencies’ Opinions Are Not Immune

Philip R. Stein

Recently, U.S. District Judge Shira A. Scheindlin, Southern District of New York, rejected the contentions of Morgan Stanley & Co. Inc. and several ratings agencies, including Standard & Poor’s, Moody’s and Fitch, that credit ratings are merely “predictive opinions” that cannot give rise to actions for negligence.

The suit involves a consolidation of two lawsuits brought by the Iowa Student Loan Liquidity Corp. and King County, Washington, for losses stemming from the October 2007 collapse of Rhinebridge, a structured investment vehicle.

Negligent Misrepresentation Claims May Be Based On Statements of Opinion

Judge Scheindlin rejected the defendants’ Motion for Reconsideration, which was based primarily on the Second Circuit’s May 10, 2012 opinion in City of Omaha, Nebraska Civilian Employees’ Retirement System v. CBS Corp. Rejecting the defendants’ arguments, the Court held that CBS was inapplicable because it addressed the actionability of opinions under federal securities law, not New York negligent representation law, a “distinct cause of action” under which opinions are actionable for negligent misrepresentation.

The court stressed that “New York courts have repeatedly held that statements of opinion may form the basis of negligent misrepresentation claims.” It cited cases in which projections were made on a utility project’s expected return, noting “where one party does have superior knowledge, the expression of any opinion implies that the declarant knows facts which support that opinion and that he knows nothing which contradicts that statement.”

Here again, therefore, we see a court finding a principal (here, Morgan Stanley), and its enablers, the credit rating agencies, vulnerable to claims by those misled during the mortgage crisis. While such entities continue to protest and seek to evade liability, Judge Scheindlin’s holding signifies that accountability may be imposed upon them.

As this case and similar cases proceed, it may well become apparent that only negligence (or worse) could possibly explain how far off the mark the ratings agencies were on so many residential mortgage-backed securitizations and other mortgage deals.

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