Court Says CalPERS May Pursue Lawsuit Against Rating Agencies

May 5, 2010

The largest U.S. public pension fund has won a court ruling allowing it to proceed with its lawsuit accusing the three biggest credit rating agencies of assigning “wildly inaccurate and unreasonably high” ratings, causing $1 billion of losses.

A San Francisco superior court judge on April 30 ruled in favor of the pension fund, the California Public Employees’ Retirement System, in rejecting a request by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings to dismiss a claim of negligent misrepresentation, CalPERS said Tuesday.

Judge Richard Kramer also threw out a separate claim alleging negligent interference with prospective economic advantage. A written opinion is expected within a few weeks.

Filed in July 2009, CalPERS’ lawsuit focuses on structured investment vehicles, which are complex packages of loans and debt, including subprime mortgages and collateralized debt obligations, that banks assemble and then sell to investors.

The pension fund contended that it had bought $1.3 billion of debt issued by Cheyne Finance LLC, Sigma Finance Inc and Stanfield Victoria Funding LLC, which were SIVs that had received “triple-A” ratings.

But it said these ratings were inflated, and that it suffered heavy losses starting in 2007 when the investments collapsed in value as credit tightened. It sought unspecified damages.

CalPERS said it provides retirement benefits to about 1.6 million public employees in California, and oversaw about $201.6 billion of assets as of Feb. 28.

Moody’s spokesman Michael Adler and S&P spokesman Frank Briamonte said their respective agencies were pleased that one CalPERS claim had been dismissed, and that they expect to eventually prevail on the misrepresentation claim.

Fitch spokesman David Weinfurter said his company plans to appeal the judge’s ruling and that CalPERS’ claim lacks merit.

Critics say rating agencies fueled a credit crisis by long assigning unreasonably high ratings to risky debt in order to win more business from issuers, which pay them for ratings.

Moody’s, S&P and Fitch face similar investor lawsuits in Manhattan federal court. One judge in that court, Jed Rakoff, in late March dismissed a class-action lawsuit accusing Moody’s and S&P of defrauding investors about the safety of $63.4 billion of mortgage debt.

Connecticut Attorney General Richard Blumenthal and Ohio Attorney General Richard Cordray have sued Moody’s and S&P over their ratings, and Cordray also sued Fitch.

California Attorney General Jerry Brown, meanwhile, last month sought a court order to force Moody’s to comply with his office’s subpoena for information about its rating practices.

Moody’s is a unit of Moody’s Corp, S&P is a unit of McGraw-Hill Cos and Fitch is a unit of France’s Fimalac SA.

The case is California Public Employees’ Retirement Systems v. Moody’s Corp et al, Superior Court of California, San Francisco County, No. 09-490241.

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