The rating agencies S&P and Moody's have struck out in their
second attempt to nix a billion-dollar negligence suit by the
California Public Employees' Retirement System on free-speech
grounds.
On Wednesday, San Francisco Superior Court Judge Richard
Kramerdenied the rating agencies' motion to strike CalPERS's
suit. In a two-part analysis under California's anti-SLAPP law,
which is intended to bar unwarranted defamation suits, Kramer
agreed with S&P and Moody's that the ratings they conferred on
private-placement mortgage-backed securities were "acts that
arise from their right of free speech under the United States or
California Constitution in connection with a public issue." But
the judge went on to conclude that CalPERS and its lawyers at
Berman DeValerio had established a prima facie likelihood that
the pension fund would succeed on its negligence claim, so the
anti-SLAPP law doesn't apply.
The ruling is very good news for CalPERS, which previously
fended off a rating agency effort to toss its case on First Amendment grounds. Like U.S. District Judge Shira Scheindlin of
Manhattan federal court in Abu Dhabi Commercial Bank's case against S&P and Moody's, Kramer ruled in 2010 that the agencies'
First Amendment right to public expression does not protect them
from liability for ratings conferred on special investment
vehicles, or SIVs, which are not publicly circulated but shown
only to a limited number of investors. After the California
state judge denied the rating agencies' motion to dismiss in
2010 -- and the intermediate state appellate court declined to
review the ruling -- the agencies' lawyers moved to strike the
CalPERS suit under the anti-SLAPP law. Essentially, the motion
gave them a second chance to argue that free-speech rights
shield them from liability for their SIV ratings.
In making a prima facie case that the pension fund would
prevail on its negligence, CalPERS' lawyers were handicapped by
the discovery stay in the case. The May 27 brief setting out the pension fund's evidence relies on evidence that emerged in a
Congressional investigation of the rating agencies' role in the
economic collapse, as well as expert testimony on the
credit-rating agencies' business model. CalPERS also offered
evidence that its advisers relied on AAA credit ratings when
they decided to invest $1.3 billion in three mortgage-backed
SIVs. "Moody's, S&P, and Fitch had no reasonable ground to
believe that their SIV ratings were true and accurate," CalPERS
asserted. The credit agencies only got paid in full if they
handed out AAA ratings, the brief said, and knew that if they
refused to bless an offering, the sponsor would turn to a rival
agency.
Fitch settled out of the case this summer (for no payout),
but in S&P and Moody's July 22 response to CalPERS's brief,
their lawyers at Cahill Gordon & Reindel (for S&P) and Satterlee
Stephens Burke & Burke (for Moody's) argued that CalPERS hadn't
shown sufficient evidence that it relied on the SIVs' ratings.
"The record on this motion ... makes clear CalPERS's explicit
recognition that the ratings were not recommendations to buy,
its acknowledgment that it should not rely on ratings, the
acknowledgment by its agents that they had conducted an
independent investigation of the investments and the wealth of
information available to them concerning the investment," the
brief said. More fundamentally, the rating agencies asserted,
their AAA ratings were opinions about the securities, so they
can't be the basis of a claim.
Kramer's ruling isn't the rating agencies' last chance to
argue for free-speech protection. The anti-SLAPP statute
includes a right to appeal. And even if that's unsuccessful, S&P
and Moody's can revive their First Amendment arguments on a
summary judgment motion.
Daniel Barenbaum of Berman DeValerio referred me to CalPERS,
which said via email, "We're pleased with the court's ruling."
S&P spokesperson Ed Sweeney sent an email comment: "We are
pleased that the court confirmed that ratings are protected
speech. However, we believe the court erred in denying our
motion under the anti-SLAPP statute. We intend to appeal." A
Moody's spokesman said, "While we are disappointed in the
court's ruling on this motion, we are confident that Moody's
will prevail on the merits of the case at a later stage."
(Reporting by Alison Frankel)
Follow Alison on Twitter: @AlisonFrankel
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