Student Blog: Law, Markets, & The Role Of The State
AFTER THE SUBPRIME MORTGAGE CRISIS, PERHAPS SOME RELIEF?
On September 2, Shira Scheindlin, a U.S. district judge ordered Morgan Stanley, Moody’s Investors Service, and Standard & Poor’s to defend fraud charges in a class-action lawsuit. The plaintiffs, Abu Dhabi Commercial Bank and King County in Washington State are accusing them of masking the risks of an investment that is linked to subprime mortgages.
Since the subprime mortgage crisis began, there have been a flood of lawsuits against investors such as these, however, very few cases have actually survived. Perhaps this could be the beginning of some relief for the victims of subprime fraud. In a 68-page ruling, Judge Scheindlin said, “where both rating agencies and Morgan Stanley knew that the ratings process was flawed, knew that the portfolio was not a safe, stable investment, and knew that the rating agencies could not issue an objective rating because of the effect it would have on their compensation, it may be plausibly inferred that Morgan Stanley and the rating agencies knew they were disseminating false and misleading ratings.” While Americans lost more than a quarter of their net worth due to the fraudulent practices of firms such as these, the executives at these financial institutions have seen an overall increase in the value of their stock options. It seems as though these financial institutions are above reproach. Despite talk of bonus caps, little has been done by regulators to “rein in the bonus culture that many believe contributed to the near collapse of the financial sector.” With Judge Scheindlin’s ruling, there may be light at the end of the tunnel and perhaps even some relief.
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