* McGraw-Hill unit says lawsuits belong in federal court
* S&P fears "patchwork" that could harm business
* U.S. pursuing separate $5 bln case over ratings quality
By Jonathan Stempel
March 6 Standard & Poor's on Wednesday began
trying to move lawsuits by 15 U.S. 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 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
S&P also said the potential for a "patchwork" of state court
injunctions governing its conduct could thwart Congress' intent
to give the U.S. 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 Feb. 5, the same day that the U.S.
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 Moody's Investors Service and Fimalac
SA's 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 U.S. 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.