Negative news flow continues for the U.S credit rating agencies, as a U.S. federal judge rejected the appeal by Morgan Stanley (MS), Moody’s Corporation (MCO) and McGraw-Hill’s (MHP) Standard & Poor’s to dismiss the fraud charges brought against them for not disclosing the risks associated with an investment related to subprime mortgages.

This fraud claim was brought against the defendants by Abu Dhabi Commercial Bank and King County in Washington State. However, U.S. District Judge Shira Scheindlin dismissed all claims brought against a fourth defendant, Bank of New York Mellon Corp. We believe this ruling could adversely affect the prospects of these credit rating agencies as it might strengthen other pending cases against them.

Recently, the rating agencies have been in the news for providing inaccurate information about some securities to certain clients. After that, the Securities & Exchange Commission (SEC), the market watchdog, criticized a rating agency for approving the application of another agency, even though the former rating agency was suspicious about the authenticity of the financial information. This whole issue is under SEC review and will give us more clarity once the SEC comes out with its findings.

In the aforementioned New York case, Morgan Stanley has been alleged for wrongfully marketing Cheyne Structured Investment Vehicle (SIV), which was declared bankrupt in August 2007, as the quality of its assets crashed. The other rating agencies are accused of giving it a high rating which ultimately misled the investors.

We believe the series of events are putting question marks on the credibility of the ratings provided by these reputed agencies, which may negatively affect their reputation and business. It is high time that the agencies took necessary measures to make their rating process much more transparent, which is very important for regaining customer confidence.

Zacks Investment Research
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