Legal News

Calpers Sues Ratings Firms; SEC Chief Also Takes Aim

By Nathan Koppel

The big credit rating firms have been drawn into another major legal battle over whether they are to blame for the financial crisis.

Calpers, the massive California pension fund, filed suit last week in San Francisco, accusing Moody's, Standard & Poor's, and Fitch Ratings of issuing "wildly inaccurate and unreasonably high" ratings on mortgage-backed securities that cost the fund hundreds of millions in losses.

Here's an article yesterday on the suit from WSJ and one from NYT. McGraw-Hill, which owns Standard & Poor, denied wrongdoing; the newspapers couldn’t reach Moody’s or Fitch for comment.

Meanwhile, the Securities and Exchange Commission’s chief said she supported proposals that would make it easier for investors to sue rating firms. SEC Chairman Mary Schapiro told a congressional panel this week that she believes proposals to impose liability standards could result in higher-quality work by the firms. WSJ story here.

Click here to see the suit, which was filed by Boston securities class action firm Berman DeValerio.

The suit, WSJ reports, sheds light on the extent to which even sophisticated investors have relied on the firms to evaluate mortgage securities and other complex investment vehicles. The firms have been criticized by lawmakers and investors for failing to cast a more skeptical eye toward mortgage securities that got high ratings during the real-estate boom but then collapsed.

In the past, ratings firms have attempted to fend off investor suits by arguing that they enjoy a First Amendment right, no different than newspapers, to issue opinions about the creditworthiness of investments. Here's an earlier WSJ article analyzing the extent to which ratings firms can use the Constitution as a shield against suits.

Full post as published by Law Blog - WSJ.com on July 16, 2009 (boomark / email).