Moody’s, McGraw Hill shares tumble a day after court ruling allows fraud case to continue

Judge says 2 ratings agencies must face claims

NEW YORK — Shares of Moody’s Corp. and McGraw Hill Cos. fell sharply Thursday, a day after a judge ruled the pair, along with Morgan Stanley, must defend themselves against fraud claims.

In a court ruling Wednesday, a federal judge in New York allowed King County in Washington state and Abu Dhabi Commercial Bank to continue with their lawsuit claiming the pair of ratings agencies and the investment bank hid the risk of investing in a fund that purchased bonds backed by subprime mortgages.

The rest of the charges against the three were dismissed, including claims of breach of contract. Also, all charges against Bank of New York Mellon Corp., a trust bank, were thrown out.

Both McGraw Hill and Moody’s said in separate statements that they were pleased nearly all charges were dropped, and are confident of winning the remaining case.

Morgan Stanley was not immediately available to comment on the case.

Shares of Moody’s, which operates the ratings agency Moody’s Investors Services, fell $2.36, or 9 percent, to $23.74. Moody’s shares have traded between $15.41 and $42.43 during the past year.

Shares of McGraw Hill, which operates Standard & Poor’s, fell $3.46, or 10.7 percent, to $28.85. Its shares have traded between $17.15 and $47.13 during the past year.

Ratings agencies have come under intense scrutiny for giving top-notch ratings to investments backed by subprime mortgages earlier this decade. As defaults and losses mounted in the housing market, especially among subprime loans in 2007, the value of bonds backed by the bad debt plummeted.

As the mortgage market collapsed, the ratings agencies have been sharply lowering the ratings on the investments.

With the value of such investments declining, funds that purchased the bonds filed for bankruptcy, including the Cheyne structured investment vehicle. King County and Abu Dhabi sued the ratings agencies and Morgan Stanley claiming the banks misled them about the safety of the investments in the Cheyne fund.

An SIV is a fund that borrows money by issuing short-term securities at a low interest rate and then lends that money by purchasing long-term securities at higher interest. That process can make a profit for its investors from the difference.

Judge Shira A. Scheindlin’s decision to allow fraud case to continue could determine whether other lawsuits brought against ratings agencies tied to their initially high ratings of soured investments are allowed to continue as well.

Morgan Stanley shares rose 27 cents to $27.36, while BNY Mellon fell 2 cents to $27.93.