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Moody's, S&P settle lawsuits accusing them of hiding risky investments

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NEW YORK — Ratings agencies Standard & Poor’s, Moody’s and investment bank Morgan Stanley have settled two lawsuits dating back to the financial crisis that accused them of hiding risky investments.

The lawsuits from King County in Washing­ton state and Abu Dhabi Commercial Bank claimed the agencies and Morgan Stanley hid the risk of investing in a fund that
purchased bonds backed by subprime mortgages.

Judge Shira Scheindlin dismissed the lawsuits Friday with prejudice, which means they can’t be filed again.

Spokesmen for S&P owner McGraw-Hill Cos., Moody’s Corp. and Morgan Stanley confirmed the settlements but did not disclose terms.

“This settlement allows us to put the significant legal defense and related costs, as well as the distraction, of these very protracted litigations behind us,” Moody’s spokesman Michael Adler wrote in an e-mailed statement. “We are satisfied that it is in the best interests of our company and shareholders.”

McGraw-Hill spokesman Jason Feuch­twanger said the cases were settled without any admission of liability or wrongdoing.

Ratings agencies came under intense scrutiny after the 2008 financial crisis for giving top ratings to investments backed by subprime mortgages. As defaults and losses mounted in the housing market, especially among subprime loans, the value of those bonds plummeted.

As the mortgage market collapsed, the ratings agencies sharply lowered their ratings on the investments.

With the value of such investments declining, funds that purchased the bonds filed for bankruptcy. King County and Abu Dhabi sued, claiming the banks misled them about the safety of some investments that were part of a structured investment vehicle.

A structured investment vehicle 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.


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