By Jonathan Stempel
Dec 3 (Reuters) - The three major credit rating agencies won
a fresh legal victory on Monday, when a federal appeals court
rejected a lawsuit by Ohio pension funds that sought to recoup
losses on risky mortgage debt they said were based on flawed,
The 6th U.S. Circuit Court of Appeals in Cincinnati upheld
the September 2011 dismissal of the lawsuit against Moody's
Corp's Moody's Investors Service, McGraw-Hill Cos' Standard &
Poor's, and Fimalac SA's Fitch Ratings.
Investors, regulators, politicians and others have
criticized the large agencies for helping to exacerbate the
housing and financial crises by awarding inflated ratings to
risky mortgage debt that quickly turned toxic.
But the agencies have long contended that their ratings
constituted protected opinion under the First Amendment to the
Five pension funds led by the Ohio Police & Fire Pension
Fund said they lost $457 million by having made 308 investments
in mortgage debt between Jan. 1, 2005, and July 8, 2008, relying
on "triple-A" ratings that proved "unfounded and unjustified."
Nonetheless, the three-judge appeals court panel unanimously
ruled that the funds failed to show the agencies should be held
liable under various Ohio laws, or for acting negligently in
misrepresenting their ratings.
"Based on publicly available information describing the
agencies' business practices, the funds draw the inference that
the agencies did not believe in the correctness of their ratings
with respect to any mortgage-backed securities the funds
purchased over a three-year period," Circuit Judge Julia Smith
Gibbons wrote for the panel. "That inference is an unreasonable
Gibbons also found no "sound basis" under Ohio or New York
law to conclude the agencies owed any duty of care to the funds.
The case was originally brought in November 2009 by
then-state Attorney General Richard Cordray, who is now the
director of the federal Consumer Financial Protection Bureau.
His lawsuit also said the business model by which debt
issuers pay for ratings created conflicts of interest, and that
agencies conspired with issuers to inflate ratings.
Lisa Hackley, a spokeswoman for current Ohio Attorney
General Mike DeWine, did not immediately respond to requests for
Moody's spokesman Michael Adler and Fitch spokesman Daniel
Noonan did not immediately respond to similar requests. S&P
spokesman Ed Sweeney had no immediate comment.
Monday's decision upheld a ruling by U.S. District Judge
James Graham in Columbus, Ohio, who agreed with the agencies
that their ratings were "predictive opinions."
It also left intact Graham's dismissal of the case with
prejudice, meaning it cannot be brought again.
Despite a series of court rulings in their favor, the
practices of rating agencies remain under scrutiny.
In an annual examination required under the 2010 Dodd-Frank
Act, the U.S. Securities and Exchange Commission last month said
some agencies have not properly disclosed methodology changes,
or were slow to follow their own policies on downgrades.
The case is Ohio Police & Fire Pension Fund et al v.
Standard & Poor's Financial Services LLC et al, 6th U.S. Circuit
Court of Appeals, No. 11-4203.
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