Judge Dismisses Claims in Mortgage Bond Suit

(April 1, 2010) – In a two-page order over alleged misstatements regarding the sale of $63 billion in mortgage-backed securities, a federal judge dismissed claims against McGraw-Hill Cos.’s Standard & Poor’s and Moody’s Corp.

After home-loan defaults skyrocketed in 2007, S&P and Moody’s have been faced with a surge of lawsuits and criticism by lawmakers and investors for failing to predict the subprime meltdown, grading mortgage bonds too generously, and maintaining the ratings.

The lawsuit alleged banks and rating companies made false statements and omissions in registration statements and prospectuses, defrauding investors who depended on their ratings before buying billions of dollars of investment-grade mortgage-backed securities.

Additionally in the lawsuit filed by institutional investors, U.S. District Judge Jed S. Rakoff in Manhattan dismissed some claims against JPMorgan Chase & Co., Bank of America Corp.’s Merrill Lynch and ABN Amro Bank NV, a unit of Royal Bank of Scotland Plc.

The claims against McGraw Hill Co., Moody’s Investors Service, Bank of America Corp.’s Merrill Lynch were dismissed with prejudice, meaning the case cannot be brought back to the courts. “We are pleased that the judge granted our motion to dismiss in its entirety,” said Frank Briamonte, spokesperson for the McGraw Hill Cos., parent of Standard and Poors, to ai5000.

Rakoff indicated he would explain his reasons in a written opinion would be issued at a later date.

“The likely reason to come from Judge Rakoff’s opinion will be important to many defendants in financial crisis litigation,” said C-Bass attorney Jamie Wareham of Paul Hastings Janofsky & Walker LLP, according to Bloomberg. “The disclosures were adequate and the market knew of the risks associated with subprime products.”

Recently, Moody’s Investors Service Inc., Standard & Poor’s and Fitch Ratings won the dismissal of a negligence and fraud lawsuit filed by two California investors who lost money on highly rated bonds. U.S. Magistrate Judge Dale A. Drozd in Sacramento ruled the investors’ complaint wasn’t specific enough about the alleged fraud.