Have you heard the astounding news that NASA has discovered ice on Mercury? It can be as hot as 800 degrees on the equator of
that planet, which is closer to the sun than any other in our
solar system. Nevertheless, computer models and lab experiments
have concluded that despite Mercury's heat, ice and frozen
organic matter can be found deep inside permanently shadowed
craters beneath the planet's surface.
So maybe hell really can freeze over. The world, in other
words, still has the capacity to surprise us -- except when it
comes to the liability of credit rating agencies for overly rosy
assessments of publicly traded securities. On Monday, the 6th
Circuit Court of Appeals joined the 1st and 2nd Circuits in
holding that the credit rating agencies cannot be sued for
misrepresenting the quality of the securities they were paid to
rate unless they knew they were issuing false opinions. Sixth
Circuit Judges Ronald Gilman, Julia Gibbons and John Rogers said
in a 20-page opinion that regardless of whether S&P, Moody's and
Fitch are judged under the common-law negligent
misrepresentation standards of Ohio or New York, five Ohio
pension funds hadn't provided sufficient evidence that the
agencies knowingly issued misleading ratings. The funds,
represented by lead counsel from Lieff, Cabraser, Heimann &
Bernstein, had asserted the familiar (and mostly futile)
argument that the agencies had an incentive to lie because they
were only paid when they issued favorable ratings.
The 6th Circuit opinion offers yet another endorsement of
the 2nd Circuit's 2011 ruling in Fait v. Regions Financial, but
it's particularly interesting that Gilman and Rogers were on the
panel that issued Monday's ruling: They were both on a
three-judge 6th Circuit panel that held credit ratings are
opinions protected by the First Amendment in the 2007 case
Compuware v. Moody's. The Compuware ruling has been the heart of
the agencies' successful evasion of liability for misleading
investors in mortgage-backed securities; Monday's decision gave
the two 6th Circuit judges a chance to reiterate their view of
credit ratings as protected opinions.
The decision also held that the Ohio funds don't have a
cause of action under state securities laws, since they couldn't
show that the agencies profited directly from the sale of the
MBS they rated, and that the credit rating agencies didn't have
a duty to MBS investors. The funds tried to liken themselves to
a group of private placement investors led by the Abu Dhabi
Bank, which, as y ou probably remember, has won rulings upholding its right to sue S&P, Moody's and Fitch over ratings of a pair
of structured investment vehicles. But the 6th Circuit said the
50 or so limited-investor MBS trusts cited by the Ohio funds
were still too widely owned to create a duty of care to
investors by the agencies.
So chalk up another win for the credit rating agencies and
their lawyers at Cahill Gordon & Reindel (S&P); Satterlee
Stephens Burke & Burke (Moody's) and Paul, Weiss, Rifkind,
Wharton & Garrison (Fitch). Maybe investors in publicly traded
securities will eventually break their Teflon shield. But I
guess we'll have to wait for pigs to fly.
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