Credit Ratings Not Always Subject to First Amendment Protection, Judge Rules

(November 28, 2011) — A federal judge has ruled that credit ratings are not always protected under the First Amendment.

The decision marks a defeat for credit rating agencies in a lawsuit brought by investors who lost money on mortgage-backed securities, Reuters reported. It stands as a setback for McGraw-Hill Cos’ Standard & Poor’s, Moody’s Corp’s Moody’s Investors Service, and Fimalac SA’s Fitch Ratings, all of which have invoked First Amendment free speech protection to guard themselves against lawsuits over their ratings.

Ratings agencies have historically claimed that the Constitution guarded them from claims they issued inflated ratings on — totaling more than $5 billion of securities issued in 2006 and 2007, before the depths of the financial crisis. Yet, the judge ruled that the ratings did not deserve the protection sought. “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 273-page opinion obtained by Reuters.  

Ratings agencies have long battled allegations over issuing misleading ratings in mortgage-backed securities after home-loan defaults skyrocketed in 2007. In a September 30 ruling, Browning ruled that Moody’s Corp., Fitch Inc. and Standard & Poor’s must face a New Mexico securities lawsuit. In December 2010, the plaintiffs, led by the Maryland-National Capital Park & Planning Commission Employees’ Retirement and the Midwest Operating Engineers Pension Trust Fund, filed an amended complaint, which aimed to represent other investors in $5 billion of Thornburg Mortgage Home Loans Inc. mortgage-backed securities.

While the suit claimed the ratings agencies violated New Mexico securities law by giving securities false and misleading AAA or Aaa ratings, lawyers for the rating companies defended the agencies’ ratings. A February 11 request to dismiss the claim by the rating companies said that the plaintiffs’ claim under New Mexico law was a “blatant attempt to avoid the parade of recent decisions that have rightly held that issuing credit ratings is not the same thing as selling or underwriting securities.”

Meanwhile, in April 2010, Standard & Poor’s and Moody’s won dismissal of a suit that involved the sale of more than $60 billion in mortgage-backed securities. 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, US 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.

In the 2010 ruling by Rakoff, the claims against McGraw Hill Co., Moody’s Investors Service, and 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,” Frank Briamonte, spokesperson for the McGraw Hill Cos., parent of Standard and Poors, told aiCIO.