Credit Rating Agencies Take a Hit

A recent ruling may have large implications for credit rating agencies and the insurance companies that rely upon them to issue corporate debt.

U.S. District Court Judge Shira Scheindlin has ruled that agency ratings were not deserving of broad protection under the First Amendment of the U.S. Constitution. The judgment stems from a lawsuit filed in the Southern District of New York, Abu Dhabi Commercial Bank and King County, Washington v. Morgan Stanley.  

The plaintiffs argue that the defendants, which include Moody's Investors Service and Standard & Poor's, gave inflated ratings to a Morgan Stanley investment vehicle that included mortgage-backed securities, which ultimately led to investment losses by the plaintiffs.

Scheindlin's ruling means that the class-action suit can continue.

If the ruling is not overturned, credit rating agencies, which have heretofore enjoyed free-speech protection similar to that granted journalists, may find it harder to argue that their opinions deserve  protection under the first amendment.

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