Rating agencies misled on IKB assets, county claims

PHILADELPHIA, Oct 2 (Reuters) - Wall Street's major rating agencies improperly gave top grades to an investment vehicle filled with toxic securities just months before it collapsed in 2007, a Washington county alleged in a federal lawsuit.

The lawsuit filed in the Southern District of New York on Friday makes some of the most specific claims against rating agencies to date as they come under scrutiny by regulators for their role in creating volatile markets.

Specifically Washington's King County, which manages cash for more than 100 public agencies, charged that top rating agencies including McGraw-Hill Cos' Standard & Poor's, Moody's Investors Service Inc and Fitch Inc wrongly assigned top scores to a structured investment vehicle known as 'Rhinebridge' before its notes was sold to investors in June 2007.

SIVs, which typically raised short-term debt to invest in longer-term, higher-yielding securities, multiplied prior to the credit crisis, but many were wiped out by the global liquidity squeeze starting in 2007 that robbed many of access to funding.

Many were hurt by investments in U.S. subprime-related loans. That was the case for Rhinebridge, created by Germany's IKB, which held more than $1 billion worth of low-quality U.S. mortgage-backed securities, the suit states.

It claims the agencies were motivated to overlook the holdings because of the high fees they could earn, even though IKB allegedly created the vehicle to move the toxic assets off its own balance sheet. The agencies had a particularly close role in creating Rhinebridge, the suit states.

Once the true holdings became clear that October, Rhinebridge's senior notes collapsed in value in what the suit describes as 'perhaps the shortest-lived 'Triple-A' fund in the history of corporate finance.'

The suit seeks class-action status and demands unspecified damages. Representatives of the three ratings agencies did not immediately return messages.

Rhinebridge was wound down in August 2008 in an auction that saw its investors recover just 55 percent of their original $1.1 billion investment.

(Reporting by Ross Kerber; Editing by Richard Chang) Keywords: RATINGS/LAWSUIT ([e-mail]; [phone]; [e-mail]) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.