US bank must answer fraud charges

ADCB wins ruling to have Morgan Stanley and two ratings agencies in court to defend themselves against fraud charges over its ill-fated investments.

The financial services giant Morgan Stanley and two credit rating agencies have been told by a US court they must defend themselves against fraud charges brought by Abu Dhabi Commercial Bank (ADCB) over its ill-fated investments in subprime mortgages. The ADCB alleged Morgan Stanley, Moody's Investors Services and Standard & Poor's masked the risks of an investment linked to subprime mortgages that eventually collapsed.

A US federal judge in New York rejected on Wednesday attempts by the three defendants to dismiss fraud claims brought by the ADCB and another plaintiff in the case, King County based in Washington state. The judge dismissed the plaintiffs' remaining claims, and all claims against a fourth defendant, Bank of New York Mellon, while granting permission for the plaintiffs to amend their complaint. ADCB was one of the first Gulf banks to report subprime losses, writing down US$19 million (Dh69.8m) in the third quarter of 2007.

Investments by international banks in the US subprime mortgage sector have soured since the collapse of the market in 2007. Losses stemming from the mortgage crisis could reach $4 trillion, according to the IMF. ADCB's case concerns its investment in Cheyne Structured Investment Vehicle (SIV), an investment facility formerly managed by the UK-based hedge fund Cheyne Capital. The bank alleged Morgan Stanley wrongly marketed the SIV as a high-quality investment, and that the rating agencies assigned improperly high ratings to it.

Many investors in Cheyne-related notes lost much or all of their investments when the vehicle went bankrupt in August 2007 after the quality of its assets fell. SIVs are complex packages of loans and debt, including collateralised debt obligations, that once held about $350 billion of assets before falling out of favour as the financial crisis hit. The California Public Employees' Retirement System, the largest public pension fund in the US, sued Moody's, S&P and Fitch Ratings in July over losses on Cheyne and other SIVs.

The latest ruling could have implications for lawsuits brought by other investors, seeking to hold banks and credit raters responsible for allegedly exaggerating the value of complex debt to win fees, and causing investors to lose money as the debt collapsed. ADCB, the UAE's third biggest bank by assets, also accused Bank of New York Mellon, acting as a depositary and processing agent, of improperly valuing Cheyne's assets and delivering reports to the rating agencies.

In a 68-page ruling, US District Judge Shira Scheindlin said the plaintiffs, who are seeking class-action status, pleaded enough facts to let the fraud claims case go forward. The judge set a date of October 1 for a status conference in the case. ADCB was unavailable for comment. A spokesman for McGraw-Hill, S&P's parent company, said the company was pleased that Scheindlin dismissed all but one of 11 claims it faced, and said it was confident it would prevail on the remaining claim.

A Bank of New York Mellon spokesman had no immediate comment. The rest of the parties were not available to comment. * with agencies