U.S. District Judge Shira Scheindlin rejected efforts by Morgan Stanley, Moody's Investors Service and Standard & Poor's to dismiss fraud claims brought by the plaintiffs, Abu Dhabi Commercial Bank and King County in Washington State.
She did, however, dismiss claims against Bank of New York Mellon Corp.
Scheindlin's ruling could affect other lawsuits brought by pension funds and other investors, seeking to hold banks and credit raters responsible for "hyping the value of complex debt to win fees and causing investor losses as the debt collapsed," according to Reuters. .
This case concerns the Cheyne Structured Investment Vehicle (SIV), which went bankrupt in August 2007. (SIVs are packages of loans and debt, including collateralized debt obligations.)
In the New York case, the plaintiffs claim Morgan Stanley wrongly marketed Cheyne as a high-quality investment, and that the rating agencies assigned improperly high ratings.
"Where both the rating agencies and Morgan Stanley knew that the ratings process was flawed, knew that the portfolio was not a safe, stable investment, and knew that the rating agencies could not issue an objective rating because of the effect it would have on their compensation, it may be plausibly inferred that Morgan Stanley and the rating agencies knew they were disseminating false and misleading ratings," the judge explains.
Scheindlin set an October 1 status conference in the case.
The California Public Employees' Retirement System, the nation's largest public pension fund, in July sued Moody's, S&P and Fitch Ratings over losses on Cheyne and other SIVs.
According to Bloomberg and the judge's recent remarks in her order, the rating companies worked directly with Morgan Stanley to structure the notes were compensated based on the notes receiving the desired ratings. The ratings companies were paid more than three times their normal fees, the judge said.
Morgan Stanley, as the arranger and placement agent for the notes, distributed documents to investors that included Moody's and S&P's ratings, according to the ruling.
Morgan Stanley did not issue a statement following the Sept. 3 ruling.