Abu Dhabi Commercial Bank v. Morgan Stanley & Co., Incorporated et al.
Raises Concerns Of Potential Uptick in SW Litigation
The fallout from the challenging market conditions of the past several months continued on August 25, 2008 when Abu Dhabi Commercial Bank filed a putative class action in the Southern District of New York seeking recovery from financial institutions and ratings agencies for unspecified losses on behalf of all persons who acquired Mezzanine Capital Notes issued by Cheyne Finance PLC (now known as SIV Portfolio PLC) and its wholly-owned subsidiary Cheyne Finance Capital Notes LLC during the period from October 2004 to October 2007. The Cheyne SIV has been in a restructuring process. and an auction was recently conducted that provided certain classes of noteholders with a partial recovery, but resulted in no recovery for holders of Capital Notes – an event that may have precipitated the filing of the lawsuit.
The named Defendants in Abu Dhabi include: Credit ratings agencies Moodys Investors Service, Inc. and Standard & Poor’s Ratings Services and The McGraw Hill Companies, Inc., Morgan Stanley & Co. Incorporated and Morgan Stanley & Co. International Limited, as arrangers and Placement Agents for the Capital Notes program; The Bank of New York Mellon. as Principal Paying Agent and Calculation Agent (among other capacities) for the Capital Notes program: and The Bank of New York Mellon’s wholly-owned subsidiary, QSR Management Limited.
Plaintiffs theory of the case essentially alleges that investors were misled into believing that the Capital Notes were low-risk investments and were adequately backed by the Cheyne SIV’s portfolio of assets. In that regard, Abu Dhabi alleges that the ratings agencies knowingly placed an unjustifiably high credit rating on the Capital Notes at the time they were issued and failed to adequately monitor the quality of the assets backing the Capital Notes. Abu Dhabi’s theory is that the ratings given to the Capital Notes were based on flawed procedures and that the Capital Notes would otherwise never have been issued. Morgan Stanley’s position as Arranger and Placement Agent purportedly provided it with access to material non-public information about the declining quality of the Cheyne SIVs assets, which Morgan failed to disclose to the holders of Capital Notes. Finally, Abu Dhabi claims that OSR and The Bank of New York Mellon were allegedly aware of the lowered quality of the Cheyne SIV’s assets because they were responsible for marking to market the value of the Cheyne SIV’s assets on a daily basis, which information was reported to the ratings agencies, but not to holders of Capital Notes. In sum, the allegations imply that some legal duty flowing from the ratings agencies and financial institutions to the holders of Capital Notes should be imposed due to the superior market information supposedly enjoyed by the named Defendants.
On these allegations, the complaint seeks to plead violations of New York State common law against each of the Defendants under several alternative causes of action, including breach of fiduciary duty, breach of contract (directly or as a third party beneficiary of contracts between the parties and Cheyne, the Issuer), breach of the covenant of good faith and fair dealing, common law fraud, negligent misrepresentation, unjust enrichment, tortious interference with contract, and aiding and abetting such violations.
