* Five Ohio pension funds say lost $457 mln on bad ratings
* Judge agrees credit ratings can be protected opinion
* Ruling is victory for S&P, Moody's, Fitch
(Recasts; adds details from decision, S&P and Fitch comment)
By Jonathan Stempel
Sept 27 The three major credit-rating agencies
won the dismissal of a lawsuit alleging that five Ohio pension
funds lost hundreds of millions of dollars on risky mortgage
debt because they relied on flawed ratings that made the debt
U.S. District Judge James Graham in Columbus, Ohio, agreed
with Standard & Poor's, Moody's Investors Service and Fitch
Ratings that their ratings are "predictive opinions."
Graham also said that absent allegations of fraudulent
intent or a duty to the funds, the agencies could not be found
negligent for assigning alleged false and misleading "triple-A"
ratings to mortgage-backed securities that later proved toxic,
causing $457 million of losses.
"The court finds that the complaint fails to allege that
the rating agencies did not believe their ratings," he wrote.
Monday's decision follows other court rulings in recent
years that have favored the agencies, which say their ratings
are opinions protected under the First Amendment to the U.S.
The decision came the same day that S&P said it had
received a Wells notice, indicating possible civil charges,
from the U.S. Securities and Exchange Commission over a complex
mortgage security that imploded soon after its 2007 issuance.
The Ohio pension funds said they made 308 investments in
mortgage debt between Jan. 1, 2005, and July 8, 2008, relying
on agency ratings that were "unfounded and unjustified."
Their case was brought in November 2009 by then-state
Attorney General Richard Cordray, who is now President Barack
Obama's nominee to become the first director of the federal
Consumer Financial Protection Bureau.
Dan Tierney, a spokesman for current Ohio Attorney General
Mike DeWine, said his office is disappointed with the decision
and is discussing it with the pension funds.
In the lawsuit, Cordray said the business model by which
debt issuers pay for ratings creates conflicts of interest, and
that the agencies conspired with issuers to achieve the
desired, inflated ratings.
Cordray also said the agencies used outdated risk models,
and left their original ratings in place long after the need
for downgrades should have become apparent.
But Judge Graham said there were no specific allegations
that the agencies knew from the outset that they were assigning
false ratings to the securities the Ohio funds bought.
He cited with approval a January ruling by a federal
appeals court in Boston, in a case against an affiliate of
Nomura Holdings Inc (8604.T) and several other banks, finding
no liability for using MBS credit ratings that were "honestly
held when formed but simply turn out later to be inaccurate."
S&P is a unit of McGraw-Hill Cos MHP.N, Moody's is a unit
of Moody's Corp (MCO.N), and Fitch is a unit of France's
Fimalac SA (LBCP.PA).
S&P spokesman Ed Sweeney, Moody's spokesman Michael Adler
and Fitch spokesman Daniel Noonan said their respective
agencies are pleased with the decision.
Cordray now works at the CFPB on enforcement issues. The
Senate has not acted on his nomination. Through a CFPB
spokeswoman, Cordray declined to comment.
The case is Ohio Police & Fire Pension Fund et al v.
Standard & Poor's Financial Services LLC et al, U.S. District
Court, Southern District of Ohio, No. 09-01054.
(Reporting by Jonathan Stempel in New York; Additional
reporting by Dave Clarke in Washington, D.C. and Noeleen Walder
in New York; editing by Dave Zimmerman and John Wallace)