Ohio AG Sues National Ratings Agencies Over Securities Information

November 20, 2009

Ohio Attorney General Richard Cordray has filed a lawsuit against national securities and credit ratings agencies Standard & Poor’s, Moody’s and Fitch over what the AG’s office called “false and misleading” securities information.

The lawsuit, filed in United States District Court for the Southern District of Ohio on behalf of five Ohio public employee retirement and pension funds, charges the rating agencies with wreaking havoc on U.S. financial markets by providing unjustified and inflated ratings of mortgage-backed securities in exchange for lucrative fees from securities issuers.

Attorney General Cordray said in an announcement released by his office that the ratings agencies had assured the state’s employee pension funds that many of the mortgage-backed securities it invested in “had the highest credit ratings and the lowest risk.” However, Cordray said, the agencies “sold their professional objectivity and integrity to the highest bidder.”

The lawsuit alleges the rating agencies gave many exotic investments the highest investment-grade credit rating, according to information released by Cordray’s office. The “AAA” rating is consistent with the credit ratings given to the safest corporate bonds, and it assured institutional investors, including the Ohio funds, that the investments were extremely safe with a very low risk of default, the AG’s office said.

Preliminary estimates indicate the improper ratings cost the Ohio Funds losses in excess of $457 million, according to the AG’s announcement.

The lawsuit alleges that the rating agencies made misleading evaluations of mortgage-backed securities due in part to the lucrative fees they received from the same issuers they were supposed to be objectively evaluating.

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

Cordray’s announcement noted that one rating agency analyst had admitted 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 that “we rate every deal. It could be structured by cows and we would rate it,” according to the announcement.

“We believe the claim has no legal or factual merit, and we intend to defend ourselves vigorously against it,” said Frank Briamonte, a spokesperson for the The McGraw-Hill Companies, which owns Standard & Poors. “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,” Briamonte added.

Kevin Duignan, managing director and global head of Corporate Communications for FitchRatings, said the company had no comment on the litigation as it has not received the complaint from the Ohio AG’s office.

Although contacted by Insurance Journal, a spokesperson for Moody’s was not immediately available for comment.

The Ohio lawsuit is being brought on behalf of the Ohio Public Employees Retirement System, the State Teachers Retirement System of Ohio, the Ohio Police & Fire Pension Fund, the School Employees Retirement System of Ohio and the Ohio Public Employees Deferred Compensation Program.

The law firms Entwistle & Cappucci LLP; Lieff Cabraser Heimann & Bernstein LLP; and Schottenstein Zox & Dunn Co., LPA are assisting with the litigation.

To read the filing, visit www.ohioattorneygeneral.gov/SecuritiesLitigationBriefing.

Source: Ohio Attorney General’s Office

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