Connecticut Urges Other States to Sue Credit Rating Agencies

Connecticut officials are encouraging other states to consider suing credit-rating agencies that gave high grades to risky mortgage-backed securities that plummeted in value when the housing market collapsed in 2007-2008.

Connecticut Attorney General George Jepsen’s office on Wednesday briefed other states on its lawsuits against Moody’s Corp. and McGraw Hill’s Standard & Poor’s.

Inflated ratings of mortgage securities are considered a key cause of the 2008 financial crisis. Critics accused the ratings firms of lowering standards to win business and misleading bond investors to buy debt they thought was safe but turned out to be toxic . The ratings firms have often called the lawsuit claims without merit and argued their ratings are opinions protected by the First Amendment.

“Everyone who has looked at this has concluded they engaged in wrongful conduct and yet they haven’t paid one penny,” Connecticut Assistant Attorney General Matthew Budzik said in a telephone interview on Thursday.

Budzik said that now that state attorneys general have agreed to a $25 billion settlement with five big U.S. banks accused of abusive foreclosure practices, they are turning to other issues.

The states now “are strongly looking at other cases stemming from the financial crisis that need to be investigated or brought — and the rating agencies are at or near the top of that list,” said Budzik.

The pact with the banks was reached last month by attorneys general in 49 states and the federal government. The settlement was designed to help about one million borrowers through measures such as loan modifications and principal reduction.

Connecticut’s lawsuits against S&P and Moody’s, filed in 2010 in state court in Hartford, accuse the raters of unfair trade practices by lying about being objective and independent.

The state is seeking restitution of ill-gotten gains and penalties for the hundreds of millions of dollars a year the firms earned in fees for mortgage debt ratings issued during the height of the housing market.

Connecticut briefed other states on its pending lawsuits against the ratings agencies during a meeting of the National Association of Attorneys General in Washington.

Maura Possley, a spokeswoman for Illinois Attorney General Lisa Madigan, said Illinois was working with Connecticut. Illinois filed a lawsuit against S&P in January, accusing the firm of assigning inflated ratings to risky mortgage-backed securities.

The Justice Department also has launched investigations into the conduct of ratings agencies leading up to the financial crisis, according to sources familiar with the situation . Investors have brought lawsuits as well, though some have been dismissed on free speech grounds.

Ed Sweeney, a spokesman for S&P, had no immediate response to Budzik’s comments. Michael Adler, a spokesman for Moody’s, did not immediately return a call for comment.

The Connecticut cases are State of Connecticut v. Moody’s Corporation, and Connecticut v The McGraw Hill Companies Inc., Superior Court, Judicial District of Hartford.