On June 15, 2010, Judge Shira Scheindlin of the U.S. District Court for the Southern District of New York issued an order denying plaintiffs’ motion for class certification in Abu Dhabi Commercial Bank et al. v. Morgan Stanley & Co. Incorporated et al. Davis Polk represents Morgan Stanley and took the lead on behalf of the defendants, which include Standard & Poor’s and Moody’s. The case was brought two years ago on behalf of all investors in a structured investment vehicle (SIV) that defaulted on its notes amid the subprime crisis in October 2007. Plaintiffs in the case asserted claims for common law fraud against Morgan Stanley and the ratings agencies, alleging that the ratings assigned to the notes issued by the SIV were false and misleading. Plaintiffs sought more than $7 billion in damages.

In December 2009, plaintiffs moved to certify a multinational class of investors, claiming that all investors in the SIV had relied to their detriment on allegedly false credit ratings. Defendants argued in opposition that the class could not be certified because individual issues of reliance would predominate and because plaintiffs had failed to meet their burden with respect to the Rule 23(a) factors of numerosity, typicality, adequacy and commonality.

In a 37-page opinion, the Court denied plaintiffs’ motion. The Court found that plaintiffs had failed to establish that the class was so numerous as to render joinder impracticable, noting that the purported class would consist entirely of sophisticated institutional investors with substantial claims. The Court also found that plaintiffs had failed to demonstrate that common issues would predominate, rejecting plaintiffs’ arguments that reliance could be presumed under the fraud-created-the-market doctrine or could be established through class-wide evidence. The decision is the first significant class certification decision related to structured investment vehicles and the subprime collapse more generally, as well as the first significant decision to address whether individual issues of reliance preclude class certification of an action based on alleged reliance on credit ratings.

The Davis Polk litigation team included partner James P. Rouhandeh and associates Antonio J. Perez-Marques, Russell Capone, Melissa Oliver, Gina Castellano, Kevin VanLandingham, Rachel S. Zeehandelaar, Marissa A.L. Jackson (not yet admitted) and Matthew A. Kelly, as well as legal assistant James M. Dean. All members of the Davis Polk team are based in the New York office.

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