Abu Dhabi Commercial Bank v. Morgan Stanley & Co.
| Decision Date | 02 September 2009 |
| Docket Number | No. 08 Civ. 7508(SAS).,08 Civ. 7508(SAS). |
| Citation | 651 F.Supp.2d 155 |
| Parties | ABU DHABI COMMERCIAL BANK, King County, Washington Together and On Behalf of All Others Similarly Situated, Plaintiffs, v. MORGAN STANLEY & CO. INCORPORATED, Morgan Stanley & Co. International Limited, the Bank of New York Mellon (f/k/a the Bank of New York), QSR Management Limited, Moody's Investors Service, Inc., Moody's Investors Service Ltd., Standard and Poor's Ratings Services and the McGraw Hill Companies, Inc., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Patrick J. Coughlin, Esq., Daniel S. Drosman, Esq., Anne L. Box, Esq., Jessica T. Shinnefield, Esq., Nathan R. Lindell, Esq., Darryl J. Alvarado, Esq., David C. Walton, Esq., San Diego, CA, Michael F. Ghozland, Esq., Los Angeles, CA, Samuel H. Rudman, Esq., Jarrett S. Charo, Esq., Melville, NY, Jason C. Davis, Esq. Coughlin Stoia Geller Rudman & Robbins LLP, San Francisco, CA, for Plaintiffs.
James P. Rouhandeh, Esq., Antonio J. Perez-Marques, Esq., Russell Capone, Esq., Davis Polk & Wardwell LLP, New York, NY, for Defendants Morgan Stanley & Co. Incorporated and Morgan Stanley & Co. International Limited.
Jonathan H. Sherman, Esq., Boies, Schiller & Flexner LLP. Washington, DC, Damien J. Marshall, Esq., Boies, Schiller & Flexner LLP, New York, NY, for Defendants The Bank of New York Mellon and QSR Management Limited.
Joshua M. Rubins, Esq., James J. Coster, Esq., Glenn C. Edwards, Esq., Justin E. Klein, Esq., Aaron M. Zeisler, Esq., Satterlee Stephens Burke & Burke LLP, New York, NY, for Defendants Moody's Investors Service, Incorporated and Moody's Investors Service Limited.
Floyd Abrams, Esq., Dean I. Ringel, Esq., Adam N. Zurofsky, Esq., Andrea R. Butler, Esq., Cahill Gordon & Reindel LLP, New York, NY, for Defendants Standard & Poor's Rating Services and The McGraw-Hill Companies, Incorporated.
Two institutional investors, King County, Washington ("King County") and Abu Dhabi Commercial Bank ("ADCB" and, together with King County, "plaintiffs"), bring this class action to recover losses stemming from the liquidation of notes issued by a structured investment vehicle ("SIV") between October 2004 and October 2007.1 Plaintiffs have sued eight defendants: Morgan Stanley & Co. Incorporated and Morgan Stanley & Co. International Limited and their affiliates (collectively, "Morgan Stanley"); The Bank of New York, now known as The Bank of New York Mellon (the "Bank"), and its wholly-owned subsidiary, QSR Management Limited ("QSR," and together with the Bank, "BoNY"); Moody's Investors Service, Inc. and its affiliates, including wholly-owned and controlled subsidiary Moody's Investors Service Ltd. (collectively, "Moody's"); The McGraw-Hill Companies, Inc. and its affiliates, including its wholly-owned and controlled business division Standard & Poor's Rating Services (collectively, "S & P," and, together with Moody's, the "Rating Agencies") (collectively, "defendants"). Plaintiffs bring thirty-two claims of common law fraud, negligent misrepresentation, negligence, breach of fiduciary duty, breach of contract and related contract claims, unjust enrichment, and aiding and abetting against defendants.2 Defendants now move to dismiss the First Amended Complaint for lack of subject matter jurisdiction and for failure to state a claim upon which relief can be granted.3 For the reasons that follow, BoNY's motion is granted. Morgan Stanley's and the Rating Agencies' motions are granted in part and denied in part.
Beginning in approximately 2004, investors, including plaintiffs, began purchasing interests issued by non-party Cheyne Finance PLC (now known as SIV Portfolio PLC) ("Cheyne PLC"), which is now in receivership as a bankrupt entity, and its wholly-owned subsidiaries Cheyne Finance LLC and Cheyne Capital Notes LLC (collectively, "Cheyne LLC," and together with Cheyne PLC, the "Cheyne SIV").5 The Cheyne SIV, as is typical of SIVs, issued three categories of notes, Commercial Paper, Medium Term Notes (together with Commercial Paper, "Senior Notes") and Mezzanine Capital Notes ("Capital Notes" and, together with the Senior Notes, "Rated Notes"), each of which was rated by the Rating Agencies.6
The notes that SIV investors purchase typically receive ratings from rating agencies as a condition precedent to purchase.7 Rating agencies, like Moody's and S & P, evaluate a debt offering based on public, and sometimes nonpublic, information regarding the assets of an issuer and assign the debt offering a rating to convey information to a potential creditor/investor about the creditworthiness of the issuer's debt.8
Historically, however, this was not always a rating agency's role. Prior to 1975, rating agencies provided unsolicited ratings on the creditworthiness of corporations, which were derived from publicly available information about the corporation, such as Securities and Exchange Commission ("SEC") filings, and charged a fee to the investor to view the rating.9 Over time, the market came to trust rating agencies for their integrity and unbiased approach to evaluating issuers and their debt offerings.10 Then, in 1975, the SEC created a special status to distinguish the most credible and reliable rating agencies, identifying them as "nationally recognized statistical rating organizations" or "NRSROs" to help ensure the integrity of the ratings process.11 According to the SEC, the "single most important criterion" to granting NRSRO status is that "the rating organization is recognized in the United States as an issuer of credible and reliable ratings by the predominant users of securities ratings" and that part of awarding the NRSRO label to the company hinges on "the rating organization's independence from the companies it rates."12
A credit rating is important to both issuers and investors. The Second Circuit has recognized that:
[Issuers] have their securities rated for two reasons. First, once the security or debt has received a favorable rating, that rating makes it easier to sell the security to investors, who rely upon [the rating agency's] analysis and evaluation. The second reason is that a favorable rating carries with it a regulatory benefit as well. Fitch, along with its direct competitors Amici Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's ("S & P"), has been designated by the Securities and Exchange Commission ("SEC") as a "nationally recognized statistical rating organization" ("NRSRO") whose endorsement of a given security has regulatory significance, as many regulated institutional investors are limited in what types of securities they may invest based on the securities' NRSRO rating.13
A credit rating also provides important information to potential investors in an SIV because an SIV's success depends on the credit quality of the assets acquired by the SIV.14 If stable instruments comprise the SIV, then SIV investors are much less likely to suffer a loss.15 These stable instruments are typically assigned high ratings of "top rated" or "investment grade" and are commonly understood in the marketplace to be stable, secure, and safe.16 Accordingly, arrangers of the investments—Morgan Stanley in this case—are able to pay investors relatively low interest rates.17
An SIV's assets typically include some combination of "investment grade" rated asset-backed securities ("ABS"), residential mortgage backed securities ("RMBS"), and collateralized debt obligations ("CDOs").18 The Cheyne SIV and its Rated Notes were invested, in part, in RMBS securities.19 Accordingly, the Cheyne SIV's Senior Notes were "top rated" notes, meaning that they received the highest possible credit ratings from the Rating Agencies.20 Moody's rated the Senior Notes "Prime-1" and "AAA," and S & P rated the Senior Notes "A-1 +" and "AAA."21 These ratings are the same as those usually assigned by the Rating Agencies to bonds backed by the full faith and credit of the United States Government, such as Treasury Bills.22 The Cheyne SIV's Capital Notes received similarly high ratings of "investment grade" and "A3/A" by Moody's and S & P, respectively.23 These were the highest credit ratings ever given to capital notes in any SIV.24 These ratings were then included in the Cheyne SIV's Information Memoranda and other Selling Documents25 that Morgan Stanley distributed to potential investors for the purpose of issuing up to twenty billion dollars in "top rated" Senior Notes and three billion dollars in "investment grade" Capital Notes. The Selling Documents were distributed with the knowledge and approval of the Rating Agencies and BoNY.26
Morgan Stanley is an investment banking and global financial services corporation headquartered in New York City.27 Morgan Stanley acted as the Arranger and Placement Agent for the Rated Notes of the Cheyne SIV.28 Pursuant to these roles, Morgan Stanley was responsible for distributing to investors Information Memoranda and other Selling Documents, containing information regarding the Rated Notes of the Cheyne SIV, including ratings assigned by the Rating Agencies and the terms and conditions of the purchase and sale of the notes and commercial paper of the Cheyne SIV.29 Morgan Stanley also engaged the Rating Agencies to rate the Cheyne SIV Rated Notes and placed the Notes with the Cheyne SIV investors.30
The Bank was the U.S. Agent, Principal Paying Agent, Calculation Agent, Depositary, Registrar, and U.S. Security Agent for the Rated Notes of the Cheyne SIV.31 QSR, its wholly-owned subsidiary, provided administrative services to the Cheyne SIV, acted as the Administrator in the sale...
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