A new lawsuit targeting Morgan Stanley says the firm talked both the Standard & Poors and Moody’s ratings agencies to assign a more favorable rating in 2006 to $23 billion worth of subprime mortgage notes than was warranted.

 

The notes were issued by Cheyne Capital Management, Ltd., a London-based hedge fund. The lawsuit is one of the largest resulting from the 2008 credit crisis. The suit claims that Morgan Stanley asked Moody’s to assign volatility assumptions to the notes that were comparable to mortgages backed with prime quality loans.

 

Morgan Stanley says it built the risk analysis methods applied to the securities and Moody’s says their ratings opinions on the securities was independent.

 

Ratings agencies involved in all lawsuits related to the 2008 financial collapse have consistently utilized the first amendment to the US Constitution to say that the ratings they issue are based on opinions which are protected by free speech.

 

But plaintiffs in the suit claim that the ratings agencies were influenced by the desire to win business and encouraged to alter their evaluation methods to be more competitive based on market share. Morgan Stanley and the ratings agencies are trying to get the suit thrown out on the basis that the economic downturn was responsible for the losses rather than actions on the part of the defendants named in the suit.

 

Either way, it seems the need for more robust due diligence continues to expand to sources once thought to be trustworthy on face value.