* Pension funds claimed $457 mln loss on toxic mortgage debt
* Funds failed to show agencies could be held liable-U.S.
By Jonathan Stempel
Dec 3 Major credit rating agencies won a fresh
legal victory on Monday when a federal appeals court rejected a
lawsuit by Ohio pension funds that sought to recoup millions of
dollars of losses on risky mortgage debt they said were based on
flawed, inflated ratings.
The 6th U.S. Circuit Court of Appeals in Cincinnati upheld
the September 2011 dismissal of the lawsuit against Moody's
Investors Service, Standard & Poor's and Fitch Ratings.
Investors, regulators and politicians have criticized the
agencies for exacerbating the housing and financial crises by
awarding high ratings to risky debt that soon turned toxic. The
agencies have long said their ratings were protected opinions
under the First Amendment to the U.S. Constitution.
Five pension funds led by the Ohio Police & Fire Pension
Fund said they lost $457 million by having made 308 investments
in mortgage debt between Jan. 1, 2005, and July 8, 2008, relying
on "triple-A" ratings that proved "unfounded and unjustified."
The three-judge appeals court panel unanimously ruled that
the Ohio funds failed to show that the agencies should be liable
under various Ohio laws, or for acting negligently in
misrepresenting their ratings.
"Based on publicly available information describing the
agencies' business practices, the funds draw the inference that
the agencies did not believe in the correctness of their ratings
with respect to any mortgage-backed securities the funds
purchased over a three-year period," Circuit Judge Julia Smith
Gibbons wrote for the panel. "That inference is an unreasonable
Eve Mueller, a spokeswoman for Ohio Attorney General Mike
DeWine, who represents the pension funds, said the office is
reviewing the decision.
S&P spokesman Ed Sweeney and Fitch spokesman Daniel Noonan
said their agencies were pleased with the decision. Moody's
spokesman Michael Adler did not respond to requests for comment.
CONFLICTS OF INTEREST
The case was originally brought in November 2009 by
then-state Attorney General Richard Cordray, who is now the
director of the federal Consumer Financial Protection Bureau.
His lawsuit also said the business model by which debt
issuers pay for ratings created conflicts of interest, and that
agencies conspired with issuers to inflate ratings.
The appeals court upheld a ruling by U.S. District Judge
James Graham in Columbus, Ohio, who agreed with the agencies
that their ratings were "predictive opinions."
It also left intact Graham's dismissal of the case with
prejudice, meaning it cannot be brought again.
Moody's Corp owns Moody's Investors Service,
McGraw-Hill Cos owns Standard & Poor's, and Fitch is
part of France's Fimalac SA.
Despite a series of court rulings in their favor, the
practices of rating agencies remain under scrutiny.
In an annual examination required under the 2010 Dodd-Frank
Act, the U.S. Securities and Exchange Commission last month said
some agencies have not properly disclosed methodology changes or
were slow to follow their own policies on downgrades.
Moody's shares closed up 40 cents at $48.98 in Monday
trading, while McGraw-Hill shares rose 33 cents to $53.44.
The case is Ohio Police & Fire Pension Fund et al v.
Standard & Poor's Financial Services LLC et al, 6th U.S. Circuit
Court of Appeals, No. 11-4203.