For the last two years, U.S. District Judge Shira Scheindlin of
Manhattan has been a dim ray of hope for investors who believe
the credit rating agencies should be called to account for
issuing rosy predictions about toxic mortgage-backed securities.
In a pair of cases in which investors in two special purpose
vehicles sued the major agencies, Scheindlin held that ratings
weren't protected by the First Amendment because they weren't
widely distributed. A while back, she refused to dismiss common
law fraud claims against Standard & Poor, Moody's and Fitch.
Then, in May, the judge permitted investors' counsel at Robbins
Geller Rudman & Dowd to tack on state-law negligent misrepresentation claims against the agencies as well.
Last week Scheindlin denied the rating agencies' motion to reconsider her ruling from May. The agencies, represented by
Cahill Gordon & Reindel (S&P), Satterlee Stephens Burke & Burke
(Moody's) and Paul, Weiss, Rifkind, Wharton & Garrison (Fitch),
had argued that the judge applied the wrong standard for their
potential liability. According to their joint motion, the 2nd
Circuit Court of Appeals made clear in a May 10 ruling called
City of Omaha v. CBS that opinions aren't actionable unless
speakers know they are false.
Scheindlin disagreed. In a rather brusque 19-page ruling,
she said that regardless of the 2nd Circuit's reasoning in CBS
and a 2011 case called Fait v. Regions Financial, New York law
plainly holds that negligent misrepresentation claims can be
based on opinions. (The rating agencies also asked Scheindlin to
reconsider her ruling that they have a special responsibility to
private placement investors, but she denied that motion as
well.) In addition, the judge refused to certify the question of
their liability for opinions for appeal to the 2nd Circuit.
It's significant that Scheindlin so forcefully rejected the
credit rating agencies' arguments on the negligent
misrepresentation claim, but it will be really interesting to
see if she also finds that opinions can be the basis of common
law fraud, even if speakers didn't know they were false. In one
of the SPV cases the judge is overseeing, both sides have fully
briefed competing summary judgment motions on Abu Dhabi
Commercial Bank's common law fraud claim against the rating
agencies (and Morgan Stanley).
Investors' counsel from Robbins Geller clearly saw their
opposition to the rating agencies' reconsideration motion as a
chance to advance their summary judgment argument. Fraud is
mentioned almost as often as negligent misrepresentation in a
brief that contends opinions are actionable for either claim.
"New York courts do not restrict common law fraud or negligent
misrepresentation claims in the manner defendants suggest," the
filing argued. Robbins Geller also reminded Scheindlin that she
has previously found "defendants may be liable under New York
law in fraud and negligence for false ratings based on either
their subjective bad faith or objective lack of basis for their
The rating agencies, meanwhile, have argued in summary
judgment filings that there is a heightened standard for common
law fraud, albeit not exactly the same high bar plaintiffs have
to clear under the federal securities laws. Even though defense
summary judgment briefs on the fraud claim cite the same 2nd
Circuit rulings that Scheindlin rejected in her reconsideration
ruling on negligent misrepresentation, those aren't the rating
agencies' only ammunition.
Regardless of how Scheindlin ultimately rules on the
competing fraud motions, we should get access to some very
interesting information about the rating agencies' inner
workings. In addition to denying the defense motions for
reconsideration, the judge also took note last week of Robbins
Geller's motion to unseal the documents cited in its summary
judgment motion on the fraud claim. She asked the plaintiffs'
firm to identify the documents that should be publicly released
and asked the rating agencies to "submit specific and targeted
objections, which state the 'countervailing factors' or 'higher
values' that justify keeping the documents under seal" by June
Lawyers for S&P and Fitch did not return calls for comment.
A Moody's spokesman said in a statement that the agency
"believes the cases are entirely without merit and we are
confident the court will dismiss the claims once the claims are
(Reporting by Alison Frankel)
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