January 15th, 2012
Econintersect: Standard and Poor’s and Moody’s must face charges brought by the California Public Employees Retirement System (Calpers) that seeks compensation for ratings the two companies gave to structured investment vehicles such as mortgage backed securities (MBS). The ruling by California state court judge Richard Kramer in San Francisco rejected arguments that the ratings issued were a protected form of free speech because Calpers presented sufficient evidence that the agencies had made representations “without reasonable grounds to believe they were telling the truth.”
Follow up:In the suit which was originated in 2009, Calpers claims they suffered losses that resulted from the rating agencies “wildly inaccurate” of investment vehicles known as SIVs (special investment vehicles). Specified in the suit were specific SIVs that were assembled in 2006 containing primarily subprime mortgages. These investments were given AAA ratings in spite of the fact that they contained mortgages likely to default.
According to a legal expert quoted by Bloomberg, the ruling was not on the merits of the case. It apparently was simply denial of a motion to dismiss. However, a third rating agency, Fitch, settled the suit by Calpers in August 2011 and has agreed to provide the plaintiff with documents related to the case.
GEI managing editor John Lounsbury has written an analysis report of how these ratings were achieved (The Alchemy of Securitization).
The filings and documents associated with this case can be viewed at webaccess.sftc.org. Fees are required to access some of the documents.
Hat tip to Roger Erickson.