For the last two years, U.S. District Judge Shira Scheindlin of Manhattan has been a dim ray of hope for investors who believe the credit rating agencies should be called to account for issuing rosy predictions about toxic mortgage-backed securities. In a pair of cases in which investors in two special purpose vehicles sued the major agencies, Scheindlin held that ratings weren't protected by the First Amendment because they weren't widely distributed. A while back, she refused to dismiss common law fraud claims against Standard & Poor, Moody's and Fitch. Then, in May, the judge permitted investors' counsel at Robbins Geller Rudman & Dowd to tack on state-law negligent misrepresentation claims against the agencies as well.

Last week Scheindlin denied the rating agencies' motion to reconsider her ruling from May. The agencies, represented by Cahill Gordon & Reindel (S&P), Satterlee Stephens Burke & Burke (Moody's) and Paul, Weiss, Rifkind, Wharton & Garrison (Fitch), had argued that the judge applied the wrong standard for their potential liability. According to their joint motion, the 2nd Circuit Court of Appeals made clear in a May 10 ruling called City of Omaha v. CBS that opinions aren't actionable unless speakers know they are false.

Scheindlin disagreed. In a rather brusque 19-page ruling, she said that regardless of the 2nd Circuit's reasoning in CBS and a 2011 case called Fait v. Regions Financial, New York law plainly holds that negligent misrepresentation claims can be based on opinions. (The rating agencies also asked Scheindlin to reconsider her ruling that they have a special responsibility to private placement investors, but she denied that motion as well.) In addition, the judge refused to certify the question of their liability for opinions for appeal to the 2nd Circuit.

It's significant that Scheindlin so forcefully rejected the credit rating agencies' arguments on the negligent misrepresentation claim, but it will be really interesting to see if she also finds that opinions can be the basis of common law fraud, even if speakers didn't know they were false. In one of the SPV cases the judge is overseeing, both sides have fully briefed competing summary judgment motions on Abu Dhabi Commercial Bank's common law fraud claim against the rating agencies (and Morgan Stanley).

Investors' counsel from Robbins Geller clearly saw their opposition to the rating agencies' reconsideration motion as a chance to advance their summary judgment argument. Fraud is mentioned almost as often as negligent misrepresentation in a brief that contends opinions are actionable for either claim. "New York courts do not restrict common law fraud or negligent misrepresentation claims in the manner defendants suggest," the filing argued. Robbins Geller also reminded Scheindlin that she has previously found "defendants may be liable under New York law in fraud and negligence for false ratings based on either their subjective bad faith or objective lack of basis for their statements."

The rating agencies, meanwhile, have argued in summary judgment filings that there is a heightened standard for common law fraud, albeit not exactly the same high bar plaintiffs have to clear under the federal securities laws. Even though defense summary judgment briefs on the fraud claim cite the same 2nd Circuit rulings that Scheindlin rejected in her reconsideration ruling on negligent misrepresentation, those aren't the rating agencies' only ammunition.

Regardless of how Scheindlin ultimately rules on the competing fraud motions, we should get access to some very interesting information about the rating agencies' inner workings. In addition to denying the defense motions for reconsideration, the judge also took note last week of Robbins Geller's motion to unseal the documents cited in its summary judgment motion on the fraud claim. She asked the plaintiffs' firm to identify the documents that should be publicly released and asked the rating agencies to "submit specific and targeted objections, which state the 'countervailing factors' or 'higher values' that justify keeping the documents under seal" by June 18.

Lawyers for S&P and Fitch did not return calls for comment. A Moody's spokesman said in a statement that the agency "believes the cases are entirely without merit and we are confident the court will dismiss the claims once the claims are presented fully."

(Reporting by Alison Frankel)

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