Credit Ratings

S&P ratings inflation suits sent to state courts


Standard & Poor's suffered a defeat Tuesday in litigation accusing it of inflating credit ratings prior to the 2008 financial crisis, as a federal judge ruled that lawsuits by 16 U.S. states and Washington, D.C., belong in state courts, not federal court.

Tuesday's decision by U.S. District Judge Jesse Furman in Manhattan raises the McGraw Hill Financial unit's potential costs to defend itself and exposes it to a greater risk of multiple judgments, conflicting rulings and higher legal bills.

S&P spokeswoman Catherine Mathis had no immediate comment. The rating agency has defended its ratings practices.

Standard & Poor's headquarters in the financial district of New York.
Stan Honda | AFP | Getty Images

The states accused S&P of fraudulently inflating ratings on structured finance securities to win more business from issuers, while representing that its ratings were objective and not tainted by conflicts of interest.

Many of the challenged ratings were for collateralized debt obligations and other mortgage-backed securities whose value plunged during the nation's housing and credit crises.

Most of the lawsuits were filed in February 2013, when the U.S. Department of Justice filed its own $5 billion lawsuit against S&P in a California federal court where it is still pending.

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Led by Tennessee, the states said they should be allowed to pursue their cases in their own courts and try to enforce state laws on consumer protection and deceptive trade practices.

In a 52-page decision, Furman agreed.

While acknowledging that trying big cases in one federal court can lead to "promoting efficiency and minimizing the risks of inconsistent rulings and unnecessary duplication of efforts," the judge ultimately concluded that he lacked jurisdiction.

"At bottom, the disputes in these cases are disputes arising under state law that belong in state courts," the judge wrote, without ruling on the merits of the ratings claims. "Congress has not authorized federal courts to hear such cases."

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Arizona, Arkansas, Colorado, Delaware, Idaho, Indiana, Iowa, Maine, Mississippi, Missouri, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee and Washington had sought to return their cases to state court. The judge said his reasoning also applies to Washington, D.C.

Furman ruled almost one year after the U.S. Judicial Panel on Multidistrict Litigation consolidated the state cases before him, saying it would promote efficiency.

"The states are extremely pleased with today's ruling," Olha Rybakoff, senior counsel in the office of Tennessee Attorney General Robert Cooper, said in a phone interview.

Mississippi's lawsuit also named S&P rival Moody's Investors Service, a unit of Moody's, as a defendant, and Furman moved that case back to state court.

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The judge also dismissed S&P lawsuits seeking to halt civil enforcement actions by South Carolina and Tennessee.

McGraw Hill shares were down 52 cents at $81.86 in afternoon trading.

— By Reuters