NEW YORK, September 5 (Reuters) – Credit rating agencies may find it harder to argue that their opinions deserve free speech protection after a judge rejected efforts by Moody's Investors Service and Standard & Poor's to dismiss a fraud lawsuit.

In a case alleging that inflated ratings on risky mortgages led to investment losses, US District Judge Shira Scheindlin said on Wednesday that ratings on notes sold privately to a group of investors were not ''matters of public concern'' deserving broad protection under the First Amendment of the US Constitution.

The Manhattan judge said investors may pursue their lawsuit accusing Moody's, S&P and Morgan Stanley, which marketed the notes, of issuing false and misleading statements about the notes, which were backed by subprime mortgages and other debt.

Scheindlin's ruling may affect lawsuits by pension funds – including the nation's largest, the California Public Employees' Retirement System, or CalPERS – and other investors that want to hold banks and rating agencies responsible for exaggerating the value and safety of debt in order to win fees.

''This is potentially a very significant opinion,'' said Joseph Mason, a finance professor at Louisiana State University's business school in Baton Rouge.

''It seems they have found a hole in the First Amendment defense, the agencies' primary line of defense,'' he said.

''There is a feeling throughout the investment industry that agencies committed an egregious breach, but the issue is how to gain traction under the law. This opinion seems to give hope.'

Rating agencies typically get broad free-speech protection similar to that afforded journalists and plaintiffs must often show that ratings reflect ''actual malice'' before they can recover. That protection, of course, is not absolute.

''The First Amendment doesn't allow anyone to commit fraud,'' said George Cohen, a professor at the University of Virginia School of Law.

Sean Egan, managing director of Egan-Jones Ratings Co., an independent agency critical of how rivals are compensated, called Scheindlin's ruling ''a watershed event. This is the first major breach in the First Amendment defense, and makes it substantially easier for other plaintiffs.''

The ruling concerned the Cheyne Structured Investment Vehicle, a package of debt that included subprime mortgages.

Scheindlin said Cheyne issued some notes with ''triple-A'' ratings, the same as the US government, and others that won ''the highest credit ratings ever given to capital notes.''

Meanwhile, the rating agencies were paid more than three times their normal rate and their fees were ''contingent upon the receipt of desired ratings,'' she said.

Desirable ratings did nothing to save the Cheyne SIV. It went bankrupt in August 2007.

''You can't yell fire in a crowded theater, but here it seems the agencies were doing the opposite,'' said Jonathan Macey, a professor at Yale Law School. ''There was a fire, but they were saying there was nothing to worry about and taking money for saying that.''

The case was brought by Abu Dhabi Commercial Bank and King County in Washington state, which includes Seattle. Moody's Corp owns Moody's Investors Service, while McGraw-Hill Cos Inc. owns S&P.

Floyd Abrams, the best-known First Amendment lawyer, represents S&P. His office referred a call to S&P spokesman Steven Weiss, who declined to discuss the free-speech issue.

Moody's spokesman Michael Adler said the company hopes the court will revisit its First Amendment ruling ''once the true facts are before it.''

Morgan Stanley spokeswoman Jennifer Sala declined to comment.

In her 68-page ruling, Scheindlin said rating agencies are not afforded the broadest free-speech protection when they distribute ratings to ''a select group of investors'' rather than the public at large.

The judge said an agency's opinion may be challenged ''if the speaker does not genuinely and reasonably believe it or if it is without basis in fact.'' It is no defense to hide behind disclaimers that ratings reflect opinion, she added.