UPDATE 3-S&P suffers a defeat in U.S. states' lawsuits over ratings

Tue Jun 3, 2014 5:25pm EDT

(Adds Iowa attorney general, Moody's comments)

By Jonathan Stempel

NEW YORK, June 3 (Reuters) - Standard & Poor's suffered a defeat on Tuesday in litigation accusing it of issuing misleading credit ratings prior to the 2008 financial crisis, as a federal judge ruled that lawsuits by 16 U.S. states and Washington, D.C. belong in state courts, not federal court.

The decision by U.S. District Judge Jesse Furman in Manhattan may raise the McGraw Hill Financial Inc unit's costs to defend itself and exposes it to a greater risk of multiple judgments, conflicting rulings and higher legal bills.

In their lawsuits, the states accused S&P of fraudulently representing that its ratings on structured finance securities 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 nation's housing and credit crises.

"At bottom, the disputes in these cases are disputes arising under state law that belong in state courts," Furman wrote in his 52-page decision. "Congress has not authorized federal courts to hear such cases."

Furman did not decide the merits of the ratings claims, but said state courts can address the states' primary goal of "securing an honest marketplace" for consumers and businesses.

S&P spokesman Edward Sweeney said: "We are committed to fully defending against these meritless claims upon their remand to the state courts."

Most of the lawsuits were filed in February 2013, when the U.S. Department of Justice sued S&P for $5 billion in a California federal court. That lawsuit remains pending.

STATES ARE PLEASED

The decision means Arizona, Arkansas, Colorado, Delaware, Idaho, Indiana, Iowa, Maine, Mississippi, Missouri, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee and Washington may pursue claims in their courts that S&P violated state consumer protection and deceptive trade practice laws.

Furman said his reasoning applies to claims by Washington, D.C., which did not formally ask to move its case.

"The states are extremely pleased with today's ruling," said Olha Rybakoff, senior counsel for Tennessee, which led the states in the litigation.

Iowa Attorney General Tom Miller in a statement said he and his counterparts "will move quickly to advance these cases."

Mississippi's lawsuit also named S&P rival Moody's Investors Service, a unit of Moody's Corp, as a defendant, and Furman moved that case back to state court.

The judge dismissed S&P's lawsuits seeking to halt civil enforcement actions by South Carolina and Tennessee.

Moody's spokesman Michael Adler declined to comment.

Furman ruled almost one year after the U.S. Judicial Panel on Multidistrict Litigation consolidated the state cases, hoping to promote efficiency.

The judge acknowledged trying big cases in a single federal court can accomplish that, but said state courts "have devised creative means to coordinate among themselves when appropriate."

The case is In re: Standard & Poor's Rating Agency Litigation, U.S. District Court, Southern District of New York, No. 13-md-02446. (Reporting by Jonathan Stempel in New York; Additional reporting by Aruna Viswanatha in Washington, D.C.; Editing by Cynthia Osterman)

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