Ohio AG Goes After S&P, Moody’s, Fitch On ABS Ratings

By Christopher Norton

Law360, New York (November 20, 2009) -- The Ohio attorney general has targeted the three leading ratings agencies with allegations of wreaking havoc on the U.S. financial markets by providing unjustified and inflated ratings of asset-backed securities in exchange for lucrative fees from securities issuers.

Richard Cordray filed the suit on behalf of five Ohio public employee retirement systems against Standard & Poor’s Financial Services LLC, S&P parent The McGraw-Hill Cos. Inc., Moody’s Corp., Moody’s Investors Service Inc. and Fitch Inc. in the U.S. District Court for the Southern District of Ohio on Friday.

The rating agencies falsely represented that their AAA credit ratings were independent, objective, and based upon thoughtful and adequate methodologies, the complaint says.

In truth, the rating agencies subverted those principles and negligently provided unjustified and inflated ratings in exchange for the lucrative fees that the ABS issuers paid the defendants for not only rating the securities but also for helping to structure them, the complaint says.

The ratings agencies’ actions constituted negligent misrepresentation and violated Ohio securities law, according to the complaint.

According to preliminary estimates, the improper ratings cost the Ohio funds losses in excess of $457 million, Cordray said Friday.

“The rating agencies assured our employee pension funds that many of these mortgage-backed securities had the highest credit ratings and the lowest risk,” Cordray said. “But they sold their professional objectivity and integrity to the highest bidder.”

“The rating agencies’ total disregard for the life’s work of ordinary Ohioans caused the collapse of our housing and credit markets and is at the heart of what’s wrong with Wall Street today,” Cordray said.

Public statements and testimony indicate that rating agency executives and analysts knew their ratings of mortgage-backed securities were wrong, the complaint says.

Cordray cited one rating agency analyst’s admission that the market for mortgage-backed securities was “little more than a house of cards,” with a much higher risk of devaluation than indicated by the purported investment-grade AAA rating.

Another rating agency analyst said, “We rate every deal. It could be structured by cows and we would rate it,” according to Cordray.

“We believe the claim has no legal or factual merit, and we intend to defend ourselves vigorously against it,” a McGraw-Hill spokesperson said Friday.

“A recent SEC examination of our business practices found no evidence that decisions about ratings methodologies or models were based on attracting or losing market share,” the spokesperson said.

“Fitch has no comment as we have not received the Ohio attorney general’s complaint,” Kevin Duignan, managing director and global head of corporate communications for Fitch, said Friday.

Cordray is currently representing the funds in several other major securities cases, including class action securities lawsuits against AIG, Bank of America, Fannie Mae and Freddie Mac, and to date has obtained more than $2 billion from such cases.

In the current case, he is seeking rescission of the funds’ purchases of the securities at issue, compensatory damages, interest, costs and attorneys’ fees, according to the complaint.

Representatives for Moody’s did not respond to requests for comment by press time Friday.

Counsel information for the defendants was not immediately available.

The case is Ohio Police & Fire Pension Fund et al. v. Standard & Poor’s Financial Services LLC et al., case number 2:09-cv-1054, in the U.S. District Court for the Southern District of Ohio.

--Additional reporting by Evan Weinberger