Wednesday, 28 September 2011

Standard and Poor's, Moody's and Fitch win dismissal of case

Standard and Poor's, Moody's Corp., and Fitch Inc., have won dismissal of a case brought against them in the Ohio courts by five public employee pension funds. The funds claimed that the ratings given to certain mortgage backed securities were faulty and caused them to lose money.

US District Judge James L. Graham, throwing the case out yesterday, agreed with previous case law that the opinions were mere "predictive opinions", and without specific intention to defraud by the ratings agencies, there was no liability. Former Ohio Attorney General Richard Cordray, who filed the suit in 2009, and who has since been replaced by current Ohio Attorney General Mike DeWine, claimed that the ratings assigned to the securities - all AAA or equivalent - were assigned because of payments made by the issuers. Further action by the current Attorney General has been promised.

As stated, the case confirms previous rulings in the US regarding the legal status of ratings, which are considered to be public opinion, protected under the First Amendment to the US Constitution. This was first clarified in 1999 in the Jefferson County case where a suit against Moody's was dismissed. The Jefferson County School District had sued Moody's, claiming that ratings assigned to bonds issued were unfair, causing financial distress to the County. Dismissing the case, the US Court of Appeals of the Tenth Circuit found the statements too vague to be "provably false".

In a similar case in Orange County, also in 1999, a Santa Ana judge also found that without proof of actual malice, Orange County would not be able to succeed in an action against Standard and Poor's. Orange County claimed that ratings ascribed by Standard and Poor's had been too high.

The result? Ratings assigned by CRA's are "public opinions" protected as such under the First Amendment to the Constitution, and therefore without proof of actual malice are not open to legal challenge. For a more detailed overview of the US case law see this post. For the time being, all suits brought against rating agencies have been in the US. It is, however, unlikely that any result in Europe would vary.


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