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Wall Street Bank Sued for Collaborating with Credit Rating Agencies

By Sally Maison
Published: Sunday, January 3rd, 2010

A Virgin Island pension funds sued Morgan Stanley after a failed asset-backed security worth $1.2 billion. The Wall Street bank was accused of collaborating with credit rating agencies Standard & Poor’s and Moody’s Investors Services Inc in order to obtain AAA credit ratings for Libertas, a collateralized debt obligation (CDO) it marketed in 2007, in an attempt to generate huge profit from unknowing investors.

Wall Street Bank Sued for Collaborating with Credit Rating AgenciesAccording to the complaint, the CDO consisted of low-quality assets, which includes securities issued by subprime lenders Option One Mortgage Corp. (owned by H&R Block Inc during the time of the sale) and New Century Financial Corporation, which went bankrupt right away. The Virgin Island pension funds alleged that Morgan Stanley knew that the securities were bound to fail but collaborated with credit rating agencies to “defraud” investors with a triple-A, the highest rating the agencies give to securities, investments, and organizations.

The complaint further alleged that Morgan Stanley knew that the CDO’s value would fall, which it did so in 2008. The bank’s spokeswoman, Alyson Barnes, declined to comment and S&P spokesperson Frank Briamonte is yet to give his opinion. Moody’s has not commented yet as well. However, the holding companies for the respective agencies, McGraw-Hill Companies and Mood’s Corp, were not included in the lawsuit.

Industry specialists note that such case is quite common, as many banks are sued by investors who claim that they are deliberately misled into risky securities that are tied to subprime mortgages. They often allege that banks work with credit rating agencies to get top-rank ratings to attract security buyers.

Morgan Stanley is also a defendant in another Manhattan case that concerns whether credit rating agencies should be given free speech protection when giving their opinions.

The complaint filed Dec. 24 said the Wall Street bank was aware that securities in the Libertas CDO were suffering a dramatic increase in delinquencies, but it claimed that the values will only be affected I the $1 trillion market. The CDO totaled at $1.2 billion. The complaint added that Morgan Stanley’s representations is equivalent to saying that the investment “may” fail, without mentioning that high-risk factors which make it almost certainly bound for failure.

Class-action status, and compensatory and punitive damages, is sought by the complainant among other remedies. The lawsuit was filed by Coughlin Stoia Geller Rudman & Robbins LLP, a firm which specializes in class-action suits.

However, the lawsuit apparently did not affect Morgan Stanley’s market performance as its shares went up by 22 cents to $29.51 in New Stock Exchange’s afternoon trading.

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