Federal Judge Dismisses Lawsuit Brought by Ohio Pensions Against Big-Three Credit Agencies

(September 28, 2011) — Standard & Poor’s, Moody’s, and Fitch have won the dismissal of a lawsuit brought by Ohio public employee pension funds.

The judge asserted that the ratings agencies were only offering their opinions, which are protected by free speech. “The Ohio funds make a bare allegation that the ratings agencies knew or should have known that their ratings were false or misleading,” US District Judge James L. Graham in Columbus wrote, according to Bloomberg. “But a complaint must provide further factual enhancement to avoid dismissal.”

The plans named as plaintiffs in the suit were the $75 billion Ohio Public Employees Retirement System, the $66.2 billion Ohio State Teachers’ Retirement System, the $12.3 billion Ohio Police & Fire Pension Fund, the $10.5 billion Ohio School Employees Retirement System, and the $762 million Ohio State Highway Patrol Retirement System, all of Columbus.

The lawsuit — originally filed by former Ohio Attorney General Richard Cordray in 2009 — alleged that the ratings agencies all listed the Ohio pensions’ investments as Triple A — misjudgments that cost the Ohio funds upward of $457 million when they purchased securities they believed to be safe but were, in fact, set to fail as mortgage delinquencies rose in 2007 and 2008. According to a release from Cordray in 2009, the rating agencies were making “spectacularly misleading evaluations of mortgage-backed securities due in part to the lucrative fees they received from the same issuers they were supposed to be evaluating objectively.” Furthermore, the statement asserted that numerous people at these firms knew the ratings were incorrect. “We rate every deal,” the statement quoted a rating agency analyst as saying. “It could be structured by cows and we would rate it.”

Following the judge’s dismissal of the lawsuit, Michael Adler, a spokesman for Moody’s said the company “is pleased that the court has dismissed all of the claims in this matter.”

Ohio is not the first state to have filed suit against the much-maligned agencies: Mississippi and California have done so, also on behalf of public pension plans pinned with losses after holding mortgage-backed securities and other derivatives that were, in hindsight, clearly incorrectly rated.