The three major credit-rating agencies won a fresh legal victory on Monday, when a federal appeals court rejected a lawsuit by Ohio pension funds that sought to recoup losses on risky mortgage debt they said were based on flawed, inflated ratings.
The 6th U.S. Circuit Court of Appeals in Cincinnati upheld the September 2011 dismissal of the lawsuit against Moody's Corp.'s Moody's Investors Service, McGraw-Hill Cos.' Standard & Poor's, and Fimalac SA's Fitch Ratings.
Investors, regulators, politicians and others have criticized the large agencies for helping to exacerbate the housing and financial crises by awarding inflated ratings to risky mortgage debt that quickly turned toxic.
But the agencies have long contended that their ratings constituted protected opinion under the First Amendment to the U.S. Constitution.
Five pension funds led by the Ohio Police & Fire Pension Fund said they lost $457 million by having made 308 investments in mortgage debt between January 1, 2005, and July 8, 2008, relying on "triple-A" ratings that proved "unfounded and unjustified."
Nonetheless, the three-judge appeals court panel unanimously ruled that the funds failed to show the agencies should be held liable under various Ohio laws, or for acting negligently in misrepresenting their ratings.
"Based on publicly available information describing the agencies' business practices, the funds draw the inference that the agencies did not believe in the correctness of their ratings with respect to any mortgage-backed securities the funds purchased over a three-year period," Circuit Judge Julia Smith Gibbons wrote for the panel. "That inference is an unreasonable one."
Gibbons also found no "sound basis" under Ohio or New York law to conclude the agencies owed any duty of care to the funds.
The case was originally brought in November 2009 by then-state Attorney General Richard Cordray, who is now the director of the federal Consumer Financial Protection Bureau.
His lawsuit also said the business model by which debt issuers pay for ratings created conflicts of interest, and that agencies conspired with issuers to inflate ratings.
Lisa Hackley, a spokeswoman for current Ohio Attorney General Mike DeWine, did not immediately respond to requests for comment.
Moody's spokesman Michael Adler and Fitch spokesman Daniel Noonan did not immediately respond to similar requests. S&P spokesman Ed Sweeney had no immediate comment.
Monday's decision upheld a ruling by U.S. District Judge James Graham in Columbus, Ohio, who agreed with the agencies that their ratings were "predictive opinions."
It also left intact Graham's dismissal of the case with prejudice, meaning it cannot be brought again.
Despite a series of court rulings in their favor, the practices of rating agencies remain under scrutiny.
In an annual examination required under the 2010 Dodd-Frank Act, the U.S. Securities and Exchange Commission last month said some agencies have not properly disclosed methodology changes, or were slow to follow their own policies on downgrades.
The case is Ohio Police & Fire Pension Fund et al v. Standard & Poor's Financial Services LLC et al, 6th U.S. Circuit Court of Appeals, No. 11-4203.
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