(February 5, 2013) — The United States Government is to join a long line of pension funds to have sued a ratings agency over misrepresentation of risk during the financial crisis.
Standard and Poor’s (S&P) announced yesterday that the Department of Justice had filed a civil case against the company in the federal court of Los Angeles, accusing it of inflating the ratings of mortgage investments and setting them up for a crash, the New York Times initially reported.
More than a dozen state prosecutors are expected to join the federal suit, and the New York attorney general is preparing a separate action, the newspaper reported. The Securities and Exchange Commission has also been investigating possible wrongdoing at the ratings agency.
From September 2004 through October 2007, S&P “knowingly and with the intent to defraud, devised, participated in, and executed a scheme to defraud investors”, the New York Times cited from the lawsuit filed by the Department of Justice.
The move follows a significant number of lawsuits filed by international pension funds who have taken these agencies to task over what they consider to be their part in the financial crisis.
One of the first, and largest, pension funds to sue was the California Public Employees Retirement System (CalPERS). The $245 billion fund filed a suit in July 2009 and almost a year later won a court decision allowing it to proceed to sue the three biggest credit rating agencies – S&P, Moody’s Investors Services, and Fitch Ratings — saying their faulty risk assessments caused $1 billion in losses.
Public pension funds in Ohio were not as lucky with their legal proceedings. In September 2011, a District Court judge threw out a case brought against these three main agencies based on the same issue.
However, just one month later pension funds in New Mexico received the legal “go-ahead” to pursue these agencies for losses and last year a Manhattan court allowed a case to proceed against some agencies led by pension funds.
Legal action has not been restricted to the US. In November last year, Australian Federal Court Justice Jayne Jagot said S&P had engaged in “misleading and deceptive” conduct by placing triple-A ratings on constant proportion debt obligations created in 2006 by investment bank ABN Amro.
Other cases are expected to be brought and executed against these agencies by some of the largest global institutional investors later this year.
At the end of November 2011, a federal judge stated that, at least in the US, ratings agencies may not be able to stand behind the First Amendment regarding their right to free speech as a defense. “The court rejects the rating agency defendants’ arguments that the First Amendment provides any protection to them under the facts of this case,” US District Judge James Browning in Albuquerque, New Mexico, wrote in a report released in that month. The judge ruled that the ratings did not deserve the protection sought.
In all cases, the ratings agencies denied any wrong-doing and contested the claims.