Morningstar is being sued over its star ratings, though not because of a mutual fund. The Wall Street Journal's Sarah Morgan reports that last month three investors in Life's Good Stabi Mortgage Fund, a now-defunct hedge fund that raised $16 million from 140 investors, sued the Chicago-based ratings firm last month in federal court in Pennsylvania, for giving a "reckless" five-star to the hedge fund, a fund the SEC later successfully branded in court as a Ponzi scheme.

"If Morningstar had conducted a reasonable review, it [would] have refused to rate the fund at all or given it a much lower rating than five stars," the investors claim.

Don Phillips, head of fund research at Morningstar, countered that, due to the lack of public disclosure requirements for hedge funds, the ratings firm always warns that its hedge-fund ratings are limited and often rely on self-reported data from the funds. And a Morningstar spokeswoman told the WSJ that Morningstar gave the hedge fund in question three out of four warning flags over "operational risk flags" related to possible transparency issues.

The trio of investors each put $75,000 into the fund. In June the SEC won a summary judgment in the Ponzi scheme. 

Edited by: Neil Anderson, Managing Editor


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