Credit-Rating Agencies Win Dismissal of Mortgage-Backed Securities Case
The First Amendment may the flashiest tool at the disposal of lawyers defending credit-rating agencies sued by angry investors, but sometimes a good old hammer gets the job done just as well. On Tuesday, Manhattan federal district court judge Lewis Kaplan dismissed a case against Moody’s and McGraw-Hill’s Standard & Poor simply because the ratings agencies didn’t have anything to do with the offering documents at issue. The litigation began in the summer of 2008 in New York state court. A purported class of investors in mortgage-backed securities underwritten by Lehman Brothers sued Lehman and several Lehman executives, including former CEO Dick Fuld.
The litigation was eventually removed to federal court. After Lehman entered bankruptcy, the plaintiffs amended their complaint to target the ratings agencies, alleging that they were underwriters and sellers of the securities. The amended complaint cited the Securities Act of 1933, which imposes strict liability for making false or misleading statements in securities offerings. But in their motions to dismiss, both Moody’s and S&P claimed that they weren’t responsible for the offering documents–an argument Judge Kaplan apparently found persuasive. “The judge has obviously agreed with the arguments that we made that the ratings agencies have never been held to be potential defendants under these provisions and it was a distortion of the statute to try to bring claims against the ratings agencies, said Moody’s counsel Joshua Rubins of Satterlee Stephens Burke & Burke, according to Reuters.
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Will the dismissal help the ratings agencies in two similar cases pending in Manhattan federal district court before Judge Jed Rakoff and Judge Harold Baer? “Hope so,” said S&P counsel Floyd Abrams of Cahill Gordon & Reindel, when we asked him. Lead plaintiffs counsel was Cohen Milstein Sellers & Toll. We e-mailed Steven Toll but didn’t hear back. Investors incensed over the good ratings the agencies gave to bad securities may have to pin their hopes on a case involving the collapse of a structured investment vehicle, which is being litigated before Manhattan federal district court judge Shira Scheindlin. As we reported last year, Judge Scheindlin allowed one of 11 common law fraud claims to proceed against S&P, which had hoped to be completely shielded by the First Amendment.
