According to a Friday report in The Wall Street Journal, Southern District of New York court Judge Shira Scheindlin, presiding over the Cheyne Finance Case, ruled on Thursday that Moody's Corp. and McGraw Hill Cos, as well as Morgan Stanley, should face fraud claims.

The court ruling implied that King County in Washington state and Abu Dhabi Commercial Bank can continue with their lawsuit - pertaining to issue of misleading credit ratings - claiming the two ratings agencies and the investment bank did not disclose the risk of investing in the Cheyne fund that purchased bonds supported by subprime mortgages.

While the judge ruled that First Amendment protection should not extend to ratings made to a limited investors' group, the claims about the breach of contract and some other charges against the Moody's, McGraw-Hill and Morgan Stanley were dismissed. In addition, the judge also scrapped all the charges against the trust bank, Bank of New York Mellon Corp.

Ratings agencies have come under the scanner for giving superlative ratings to investments backed by subprime mortgages in the beginning of the 2000s, with the value of bonds backed by the bad debt plunging, as the mortgage market collapsed!

With Judge Scheindlin allowing the mentioned fraud case to continue, other lawsuits brought against ratings agencies - alleging initially high ratings of soured investments - might just meet the same fate!