Friday, September 4, 2009
Judge Scheindlin's opinion in Abu Dhabi Commercial Bank v. Morgan Stanley & Co. Download AbuDhabiCommercialBank(S.D.N.Y. Sept. 2, 2009) is receiving a great deal of press, and deservedly so. Two institutional investors brought a class action to recover losses stemming from the liquidation of notes issued by a SIV and sued eight defendants, including two rating agencies, Moody's and S&P. The court recognized that it is "well-established" that the First Amendment protects rating agencies, subject to an "actual malice" exception, from liability arising out of their issuance of ratings and reports because their ratings are considered matters of public concern. Nevertheless, the court found that the rating agency is not afforded the same protection where its ratings were disseminated only to a select group of investors. Accordingly, the agencies' First Amendment argument was rejected because the ratings were provided in connection with a private placement to a select group of investors.
The court also rejected the argument that the ratings are nonactionable opinions instead of actionable misrepresentations, since plaintiffs adequately pled that the agencies did not genuinely or reasonably believe that the ratings were accurate and had a basis in fact.
I have a great deal of difficulty understanding how rating agencies can assert the First Amendment to escape liability for ratings that they produce and sell; we might as well say that issuers' statements in prospectuses are protected by the First Amendment. It's good to see at least a small chink in the armor.