Morgan Stanley successfully pushed Standard & Poor’s and Moody’s Investors Service Inc. to give unwarranted investment-grade ratings in 2006 to $23 billion worth of notes backed by subprime mortgages, investors claimed in a lawsuit, citing documents unsealed in federal court.
Executives at the ratings firms failed to warn investors about the risks associated with subprime-backed notes that were issued by a unit of London-based hedge fund Cheyne Capital Management Ltd. because they wanted to reap financial rewards from doing business with Morgan Stanley, the sixth-largest U.S. bank by assets and designer of the notes, the investors allege, citing the material made public yesterday in Manhattan.
“We in fact built everything,” Dorothee Fuhrmann, an executive for New York-based Morgan Stanley, said according to the documents, allegedly referring to the risk-analysis methods applied to the Cheyne ratings.
“All of us were under instructions to rate everything that we could bring in the door, and they were measuring market share on a monthly basis,” Frank Raiter, a former analyst of residential-mortgage bonds at S&P, said in a deposition, according to the documents. “I wasn’t real confident we were doing a very good job at it.”