Standard & Poor's on Wednesday began trying to move lawsuits by 15 states and Washington, D.C., over its credit ratings to federal court from state court, hoping to limit its liability in one of the biggest fraud cases tied to the financial crisis.
In multiple court filings, the McGraw-Hill Cos MHP.N unit said the "wave" of civil lawsuits raises "significant" federal regulatory and constitutional issues that should be addressed all at once, to help ensure that national securities markets operate efficiently.
S&P also said the potential for a "patchwork" of state court injunctions governing its conduct could thwart Congress' intent to give the Securities and Exchange Commission primary oversight over the ratings process, and perhaps unduly impede its ability to function.
Such a patchwork "would have the effect of making the most restrictive element from each such injunction the 'de facto' national standard," lawyers including First Amendment specialist Floyd Abrams argued in briefs filed for S&P.
Connecticut Attorney General George Jepsen leads a coalition of state attorneys general that brought the state cases.
These were announced on February 5, the same day that the Department of Justice said it was seeking $5 billion in its own civil lawsuit against S&P.
Experts said S&P might struggle to move the state cases.
"My intuition is that S&P faces an uphill battle," said Gil Seinfeld, a University of Michigan law professor specializing in federal courts and jurisdiction.
"The state and federal laws in this case do not seem to interact in the way that has been deemed sufficient to authorize removal of other cases in the past," he added. "It is not enough for S&P to say we need national uniformity, or that it could be forced to comply with the most restrictive regulator, to support removal to federal court."
Jepsen, in a statement, said with regard to the Connecticut lawsuit: "We believe S&P's motion is without merit and will respond appropriately in court."
The lawsuits accuse S&P of inflating ratings in a bid to win fees from clients, and misleading investors into believing its ratings were objective and not tainted by conflicts of interest.
Many of the challenged ratings were for collateralized debt obligations and other mortgage-backed securities whose value plunged during the housing and credit crises.
The $5 billion sought in the federal case alone is more than 10 times the profit of McGraw-Hill in 2012, and more than six times the New York-based company's year-end cash stake.
Moody's Corp's (MCO.N) Moody's Investors Service and Fimalac SA's (LBCP.PA) Fitch Ratings, which are S&P's main rivals, were not hit with similar federal lawsuits.
S&P wants to move lawsuits by Arizona, Arkansas, Colorado, Connecticut, Delaware, the District of Columbia, Idaho, Illinois, Iowa, Maine, Missouri, North Carolina, Pennsylvania, South Carolina, Tennessee and Washington, and then have the Judicial Panel on Multidistrict Litigation consolidate them.
Allowing this would minimize the chance of contradictory decisions that could cause "serious confusion and risk" to the financial markets, S&P spokeswoman Catherine Mathis said.
"We are surprised that any of these attorneys general, who so closely coordinated these cases with each other in bringing these cases, would oppose continuing to work together in a more efficient manner," she added.
Scott Dodson, a University of California at Hastings law professor, also sees an "uphill battle" for S&P, citing two recent Supreme Court decisions that he said rejected more expansive assertions of federal court jurisdiction.
A 17th lawsuit against S&P, by Mississippi, is already in federal court, while an 18th lawsuit by California will stay in state court because it overlaps a private lawsuit that was already there, S&P said.
McGraw-Hill shares fell 26.9 percent during the week the lawsuits were announced, and have since recovered about one-third of that decline. In late afternoon trading, the shares were down 29 cents at $47.90 on the New York Stock Exchange.
The Connecticut case is Connecticut v. McGraw-Hill Cos et al, U.S. District Court, District of Connecticut, No. 13-00311.