Moody’s, Fitch, S&P Battle Pension Lawsuit Over Misleading Ratings in Mortgage-Backed Securities

(October 4, 2011) — Moody’s, Fitch, and Standard & Poor’s must face a New Mexico securities lawsuit brought by investors in mortgage-backed securities, Bloomberg has reported.

After home-loan defaults skyrocketed in 2007, ratings agencies 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.

In a September 30 ruling, US District Judge James O. Browning in Albuquerque, New Mexico, denied the rating companies’ request to dismiss the claim against them.

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 claims 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.”

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.

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.