One of the themes of the litigation that followed the subprime mortgage collapse has been the credit rating agencies' wondrous ability to evade liability for the blessings they conferred on mortgage-backed securities that turned out to be dreck. The Securities and Exchange Commission has recently stepped up its investigation of Standard & Poors, and a few private placement investors have been able to get past the agencies' First Amendment defense. But private class action plaintiffs have struck out every time they've tried to bring claims against the rating agencies.

That's no longer true.

On Friday, Albuquerque federal court judge James Browning denied therating agencies' motion to dismiss claims that they made false statements in connection with the sale of securities backed by Thornburg-issued mortgages. The order doesn't include any explanation, merely citing Sept. 19 oral arguments. But the key difference between the Thornburg MBS class action and all of its unsuccessful predecessors is that the Thornburg plaintiffs were able to assert New Mexico's since-repealed state securities law.

The state blue-sky law holds that it's unlawful for anyone to make an untrue statement or fail to state a material fact in connection with the sale of a security. That's exactly what S&P, Moody's, and Fitch did, according to the class action complaint filed by lead counsel Robbins Geller Rudman & Dowd in December 2010. "The rating agency defendants," the complaint said, "issued investment grade (including Triple-A) ratings on certificates, which ratings were untrue and misleading in that the certificates were not nearly as safe as represented."

There's nothing unusual about New Mexico's law, but deploying it in an MBS class action, according to lead plaintiffs counsel Darren Robbins of Robbins Geller, took some clever strategizing by a young lawyer at his firm. In most of the unsuccessful attempts to hold the rating agencies liable, plaintiffs lawyers have argued that because the agencies were intimately involved in structuring securities to receive AAA ratings, they were de facto underwriters. As underwriters, they would be subject to strict liability for offering documents under the Securities Act of 1933-except that New York courts, including the U.S. Court of Appeals for the Second Circuit, have repeatedly held that no matter what the agencies' role in putting together mortgage-backed securities, they're simply not underwriters.

The original Thornberg complaint, filed back in 2009, made the same rating-agency-as-underwriter assertions that have since failed for plaintiffs. But Robbins Geller associate Danielle Myers, according to Robbins, realized that the firm could make claims based on New Mexico's statute because mortgage-backed bonds aren't "covered securities" under the federal law that would otherwise bar the use of the state law. "New York lawyers kept banging their heads against the wall when they would say the rating agencies were acting as underwriters," Robbins told me. "I agree with them, but at the end of the day, I don't wear a black robe."

The rating agencies, represented by the usual lineup of counsel (Cahill Gordon & Reindel for S&P; Satterlee Stephens Burke & Burke for Moody's; Paul, Weiss, Rifkind, Wharton & Garrison for Fitch), argued in their motion to dismiss that Robbins Geller was simply repurposing the same old rating-agency-as-underwriter theory under the guise of the state law. The New Mexico statute, the agencies claimed, "limits the defendants that can be held liable for false and misleading statements made in connection with the sale of securities to those that offer and sell securities. The rating agencies did neither of those two things with respect to the certificates at issue here." The agencies also asserted that there's no connection between the Thornburg MBS offerings and New Mexico's, and that the agency's ratings are protected opinions under the First Amendment. For the record, here's Robbins Geller's response.

The nine-hour Sept. 19 oral argument on the defense motions to dismiss pitted second-year Robbins Geller associate Myers against Floyd Abrams. (Jonah Goldstein of Robbins Geller argued against lawyers for the Thornburg MBS underwriters.) Judge Browning was particularly skeptical, Darren Robbins told me, when the agencies asserted that the bonds didn't emanate from New Mexico, even though Thornburg was headquartered in the state.

The big question, of course, is whether the state-law strategy that got the Thornburg MBS class past a motion to dismiss can be employed by other MBS plaintiffs against the rating agencies. According to Robbins, it won't help private plaintiffs in New York, as the law currently stands, because only the state Attorney General can sue under the Martin Act. But if MBS investors can show that the securities emanated from, say, Colorado or Washington State, Judge Browning's order could open a route to claims against the agencies. Robbins told me he's expecting the judge to issue a substantive opinion explaining Friday's order, which will be helpful to subsequent plaintiffs.

I left a message with Abrams and with Moody's counsel Joshua Rubin of Satterlee, but didn't hear back. Fitch counsel Andrew Ehrlich of Paul Weiss declined comment.

(Reporting by Alison Frankel)  

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