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Two credit-rating agencies must defend a lawsuit over the collapse of a $5.86 billion structured investment vehicle in 2007, a federal judge has ruled, rejecting an argument that their ratings are protected free speech.

In an order Wednesday, U.S. District Judge Shira Scheindlin in Manhattan rejected an argument by rating firms Moody's Investors Service and Standard & Poor's that their ratings of SIV Portfolio PLC were protected by the First Amendment. SIV Portfolio was better known by its former name, Cheyne Finance.

The judge, who partially dismissed the case, said ratings are typically protected from liability, and subject to an actual malice exception, because their ratings and reports are considered "matters of public concern."

"However, where a rating agency has disseminated their ratings to a select group of investors rather than to the public at large, the rating agency is not afforded the same protection," the judge said. "Here, plaintiffs have plainly alleged that the Cheyne SIV's ratings were never widely disseminated, but were provided instead in connection with a private placement to a select group of investors."

Two institutional investors sued Morgan Stanley (MS), Bank of New York Mellon Corp. (BK) and the two credit-rating agencies in 2008 in U.S. District Court in Manhattan.

On Wednesday, Judge Scheindlin dismissed all claims against Bank of New York Mellon, but said Morgan Stanley and the rating agencies must defend common-law fraud claims. She dismissed the remaining claims against Morgan Stanley and the rating agencies.

The lawsuit alleged Morgan Stanley, at the time it sold Cheyne assets to investors, failed to disclose that the assets backing the Cheyne SIV were far riskier than represented.

The complaint, which is seeking class-action status, was brought on behalf of persons seeking to recover losses from the liquidation of notes issued by the structured investment vehicle between October 2004 and October 2007.

Moody's Investors Service, a unit of Moody's Corp. (MCO), and S&P, a unit of McGraw-Hill Cos. (MHP), allegedly provided structuring and monitoring services, as well as "investment grade" ratings to Cheyne's assets, according to the lawsuit.

"We are pleased that the court has dismissed all but one of the 11 claims, and we are confident that we will prevail on the remaining claim," said Chris Atkins, an S&P spokesman.

Spokespersons at Morgan Stanley and Moody's couldn't immediately be reached for comment late Wednesday.

Cheyne Finance was set up and operated by London hedge fund group Cheyne Capital Management (UK) LLP until its collapse in September 2007. It changed its name to SIV Portfolio in November 2007, to reflect that Cheyne Capital was no longer involved.

-By Chad Bray, Dow Jones Newswires; 212-227-2017; chad.bray@dowjones.com