The three major credit-rating agencies won the dismissal of a lawsuit alleging that five Ohio pension funds lost hundreds of millions of dollars on risky mortgage debt because they relied on flawed ratings that made the debt appear safe.
U.S. District Judge James Graham in Columbus, Ohio, agreed with Standard & Poor’s, Moody’s Investors Service and Fitch Ratings that their ratings are “predictive opinions.”
Graham also said that absent allegations of fraudulent intent or a duty to the funds, the agencies could not be found negligent for assigning alleged false and misleading “triple-A” ratings to mortgage-backed securities that later proved toxic, causing $457 million of losses.
“The court finds that the complaint fails to allege that the rating agencies did not believe their ratings,” he wrote.
Monday’s decision follows other court rulings in recent years that have favored the agencies, which say their ratings are opinions protected under the First Amendment .
The decision came the same day that S&P said it had received a Wells notice, indicating possible civil charges, from the U.S. Securities and Exchange Commission over a complex mortgage security that imploded soon after its 2007 issuance.
The Ohio pension funds said they made 308 investments in mortgage debt between Jan. 1, 2005, and July 8, 2008, relying on agency ratings that were “unfounded and unjustified.”
Their case was brought in November 2009 by then-state Attorney General Richard Cordray, who is now President Barack Obama’s nominee to become the first director of the federal Consumer Financial Protection Bureau.
Dan Tierney, a spokesman for current Ohio Attorney General Mike DeWine, said his office is disappointed with the decision and is discussing it with the pension funds.
In the lawsuit, Cordray said the business model by which debt issuers pay for ratings creates conflicts of interest, and that the agencies conspired with issuers to achieve the desired, inflated ratings.
Cordray also said the agencies used outdated risk models, and left their original ratings in place long after the need for downgrades should have become apparent.
But Judge Graham said there were no specific allegations that the agencies knew from the outset that they were assigning false ratings to the securities the Ohio funds bought.
He cited with approval a January ruling by a federal appeals court in Boston, in a case against an affiliate of Nomura Holdings Inc and several other banks, finding no liability for using MBS credit ratings that were “honestly held when formed but simply turn out later to be inaccurate.”
S&P is a unit of McGraw-Hill Cos, Moody’s is a unit of Moody’s Corp., and Fitch is a unit of France’s Fimalac SA.
S&P spokesman Ed Sweeney, Moody’s spokesman Michael Adler and Fitch spokesman Daniel Noonan said their respective agencies are pleased with the decision.
Cordray now works at the CFPB on enforcement issues. The Senate has not acted on his nomination. Through a CFPB spokeswoman, Cordray declined to comment.
The case is Ohio Police & Fire Pension Fund et al v. Standard & Poor’s Financial Services LLC et al, U.S. District Court, Southern District of Ohio, No. 09-01054.
(Reporting by Jonathan Stempel in New York; Additional reporting by Dave Clarke in Washington, D.C. and Noeleen Walder in New York; editing by Dave Zimmerman and John Wallace)
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