* Standard & Poor's, Moody's and Fitch sued
* Lawsuit alleges agencies caused $457 million losses
* Moody's, S&P reject allegations; Fitch has no comment
* Moody's shares down 2 pct, McGraw-Hill shares down 3 pct
(Adds Moody's and S&P comments, CalPERS case, stock prices)
By Jonathan Stempel and Steve Eder
NEW YORK, Nov 20 (Reuters) - The three largest credit
rating agencies were sued on Friday by Ohio, which said their
pursuit of profit and ties to Wall Street resulted in inflated
ratings on toxic mortgage debt that cost state pension funds
hundreds of millions of dollars.
Attorney General Richard Cordray filed the lawsuit against
Standard & Poor's, Moody's Investors Service and Fitch Ratings
on behalf of five pension funds that say they lost more than
$457 million because the agencies gave false and misleading,
often "triple-A" ratings to securities they knew were risky.
"The credit rating agencies sold out, and they sold us
out," Cordray told reporters. "They traded in their
objectivity, and in exchange received massive profits."
S&P is owned by McGraw-Hill Cos
, Moody's by Moody's
Corp and Fitch by France's Fimalac SA .
Friday's lawsuit in federal court in Columbus, Ohio, was
filed four months after the nation's largest pension fund, the
California Public Employees' Retirement System, sued the
agencies over ratings they said caused $1 billion of losses.
California Attorney General Jerry Brown subpoenaed the
agencies in September as he examined whether they violated
state law. Cordray accused the agencies of breaking Ohio law,
and said he does not plan to start a class action.
The Obama administration, Congress and regulators are
weighing financial industry reforms that could tighten ratings
oversight and limit perceived conflicts of interest.
Rating agencies have in lawsuits rejected allegations of
wrongdoing, including fraud, and said their ratings constitute
opinion protected under the U.S. Constitution.
S&P spokesman Steven Weiss and Moody's spokesman Michael
Adler said Ohio's claims lack merit, and Adler added that
Cordray "appears to be seeking new scapegoats for investment
losses incurred during the unprecedented market disruption."
Fitch Managing Director Kevin Duignan declined to comment,
saying Fitch had not received the complaint.
New York Attorney General Andrew Cuomo ended a probe of
rating agencies last year with a pact that changed how fees are
charged to review mortgage-backed securities.
Friday's 77-page lawsuit recounted many alleged instances
where agencies either appeared unconcerned about ratings'
accuracy or else hungered for more business.
It included a widely quoted comment by an S&P analyst in
2007: "It could be structured by cows and we would rate it."
Cordray, like many critics, said the "issuer-pays" model
where debt issuers pay agencies for ratings creates a conflict
of interest that could lead to inflated ratings.
In a closely watched New York case in which the leading
First Amendment lawyer Floyd Abrams is defending S&P, U.S.
District Judge Shira Scheindlin in September said ratings might
not deserve the broadest First Amendment protection when they
are distributed to a "select group of investors."
She also said rating opinions could be challenged "if the
speaker does not genuinely and reasonably believe it or if it
is without basis in fact."
Cordray suggested the agencies' close ties to Wall Street
negates any First Amendment defense. "We do think that they
went well beyond offering dispassionate, neutral opinions,
where the First Amendment would have more traction," he said.
Ohio sued on behalf of the Ohio Public Employees Retirement
System, the State Teachers Retirement System of Ohio, the Ohio
Police & Fire Pension Fund, the School Employees Retirement
System of Ohio and the Ohio Public Employees Deferred
In afternoon trading on the New York Stock Exchange,
Moody's shares were down 47 cents, or 2 percent, at $22.72,
while McGraw-Hill was down 93 cents or 2.9 percent at $30.80.
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 New York, No. 09-1054.
(Reporting by Steve Eder and Jonathan Stempel; Editing by Lisa
Von Ahn, John Wallace and Matthew Lewis)