Morgan Stanley learns about free speech

Saxon Mortgage parent company Morgan Stanley learned today that freedom of speech does not mean a company can lie to investors. A U.S. federal judge has ruled that Morgan Stanley and two credit rating agencies must defend part of a class-action lawsuit over losses on a fund that collapsed during the credit crisis.

The lawsuit accused the defendants of marketing a complex instrument, the Cheyne Structured Investment Vehicle, as a high-quality investment, but masked the risks. In other words they lied about it.

Moody’s and S&P moved to dismiss the suit on free speech grounds. The judge said ratings are typically protected from liability, and subject to an actual malice exception, because their ratings are considered matters of public concern. “However, where a rating agency has disseminated their ratings to a select group of investors rather than to the public at large, the rating agency is not afforded the same protection,” the judge said.