Liability Lawsuits Against U.S. Rating Agencies Dismissed

By | May 11, 2011

The three major U.S. credit rating agencies won the dismissal of lawsuits seeking to hold them liable as “underwriters” for helping banks structure securities transactions to achieve desired ratings.

The 2nd U.S. Circuit Court of Appeals in New York upheld the dismissal of three lawsuits against McGraw-Hill Co.’s Standard & Poor’s, Moody’s Corp.’s Moody’s Investors Service and Fimalac SA’s Fitch Ratings.

The plaintiffs, including a group of unions, said they bought $155 billion in mortgage-backed securities. Many of the securities were given top-notch ratings by the agencies but declined in value when the agencies downgraded them during the 2008 mortgage crisis.

The plaintiffs claimed the agencies “exceeded their traditional roles by actively aiding in the structuring and securitization process” to achieve higher ratings.

The agencies should be considered “underwriters” under the Securities Act of 1933, the plaintiffs argued.

Under Section 11 of the statute, underwriters who make material misstatements and omissions in registration statements filed with the Securities and Exchange Commission are strictly liable.

The court held that the rating agencies did not qualify as underwriters because they did not directly participate in the distribution of the securities, but simply enabled others to do so through their ratings.

“Nothing in the statute’s text supports expanding the definition of underwriter to reach persons not themselves participating in such purchases, offers, or sales, but whose actions may facilitate the participation of others in such undertakings,” Judge Reena Raggi wrote for the court.

Judges Wilfred Feinberg and Jose A. Cabranes rounded out the three-judge panel.

Joel P. Laitman of Cohen Milstein Sellers & Toll, representing all of the plaintiffs except Vaszurele Ltd and the Wyoming state treasurer, said: “We are reviewing the decision.”

Moody’s spokesman Michael Adler said: “Moody’s is pleased that the court has affirmed the dismissal of these cases.”

Patrick Egan of Berman DeValerio represented the Wyoming State Treasurer and Wyoming Retirement System. He did not immediately return a seeking a comment. Nor did Lester Levy of Wolf Popper, representing Vaszurele.

S&P did not immediately return a request for a comment.

Andrew Ehrlich of Paul, Weiss, Rifkind, Wharton & Garrison represented Fitch. He did not immediately return a call for a comment.

The case is In re Lehman Brothers Mortgage-Backed Securities Litigation, 10-0712-cv; 10-0898-cv; 10-1288-cv.

(Reporting by Jonathan Stempel, Noeleen Walder and Joseph Ax in New York; Editing by John Wallace and Maureen Bavdek)

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