NEW YORK (9/4/09)—In a rating agency case that may have broad implications, a U.S. District Court judge here rejected arguments by Moody’s Investor Services Inc. and Standard & Poor’s (S&P) that investors can’t sue over deceptive ratings of private-placement notes because those ratings are protected by the First Amendment right of free speech. In her decision, U.S. District Judge Shira Scheindlin declined to dismiss fraud charges brought by two investors, Abu Dhabi Commercial Bank and Kings County, Washington, against Moody’s, S&P, and Morgan Stanley & Co. The ruling will force the three companies to respond to fraud charges in the class action suit that claims certain risks associated with securities backed by subprime mortgages were not exposed for investors. The case could be of interest to credit unions because similar questions regarding rating agency responsibility and investors' right to sue the ratings agencies have circulated in the credit union movement regarding investments made by corporate credit unions. “Although this court’s decision is not technically binding on the myriad of similar cases currently pending against the ratings agencies, it likely will have some influence on other judges because the U.S. District Court for the Southern District of New York is influential in financial services law,” assessed Michael Edwards, Credit Union National Association counsel for special projects. "This case did not directly involve mortgage-backed securities per se, but the court's reasoning may be applicable to a variety of debt instruments rated by these companies. Because the National Credit Union Administration (NCUA) is the conservator of U.S. Central (FCU) and (Western Corporate FCU) WesCorp, NCUA may wish to examine this decision to analyze whether it opens any paths to recovery on behalf of the conserved corporates. Reaching any sort of conclusion, however, will take a lot of research and analysis," Edwards added. Scheindlin did not rule on the merits of the lawsuit, which brings 32 counts of fraud against eight companies, but she did opine that free-speech rights cannot be used as a shield from lawsuits because the ratings firms opinions were not distributed generally to the public but rather to a select group of investors. She also noted that there is an unresolved question regarding whether the ratings agencies "genuinely or reasonably" believed that the ratings they assigned "were accurate and had a basis in fact."