Bloomberg News

S&P, Moody’s Must Face Calpers Lawsuit Over Ratings, Judge Rules

January 13, 2012

Jan. 12 (Bloomberg) -- Standard & Poor’s and Moody’s Investors Service Inc. must face California Public Employees’ Retirement System’s $1 billion lawsuit over their ratings of structured investment vehicles, a judge said.

The pension fund “produced sufficient evidence” that the ratings companies made misrepresentations “without reasonable grounds” to believe they were telling the truth, state court Judge Richard Kramer in San Francisco said in a ruling yesterday.

Calpers, the largest U.S. pension fund, sued the three major bond-rating companies in July 2009 for losses it said were caused by their “wildly inaccurate” risk assessments on so- called SIVs.

The ratings companies all gave top marks to Cheyne Finance LLC, Stanfield Victoria Funding LLC and Sigma Finance Inc., prompting Calpers to invest in them in 2006, the fund said in its complaint. The SIVs collapsed in 2007 and 2008, according to the Calpers complaint. The underlying assets of the three firms consisted primarily of risky subprime mortgages, Calpers said.

Kramer’s ruling rejected a request by the rating companies to dismiss the case under a California law designed to fend off lawsuits meant to chill public debate. He ruled in 2010 that the ratings are a form of speech that’s protected by the law. To fend off dismissal, Calpers then had to show a probability of prevailing in the lawsuit by presenting sufficient facts.

‘Strategic Lawsuits’

“It’s not a ruling on the merits of the case,” said Paul Clifford, an attorney at the California Anti-Slapp Project, a Berkeley, California-based law firm that specializes in similar lawsuits. SLAPP stands for “strategic lawsuits against public participation.”

Moody’s and S&P have 60 days to appeal the ruling, and the appeals court would take a fresh look at the evidence without considering whether Kramer erred in his decision, Clifford said in a phone interview. Neither side can present new evidence, he added.

Edward Sweeney, a spokesman for McGraw-Hill Cos.’ Standard & Poor’s Rating Services reached via e-mail, had no immediate comment about the ruling. Michael Adler, a Moody’s spokesman, didn’t immediately respond to an e-mail message seeking comment on the decision. A phone call to Sacramento-based Calper’s media office wasn’t immediately returned.

Kramer refused to dismiss the case on other grounds in 2010. Fitch Ratings Ltd. settled the lawsuit in August, agreeing to provide Calpers with documents from a lawsuit over some of the same investments pending in New York.

The SIVs, unregistered securities, could be sold only to specific classes of buyers. The assets underlying the SIVs were known only to the SIVs, and the rating companies, which published the ratings in offering materials on their websites for a brief period and on private financial reporting services, Calpers said in its complaint.

The case is California Public Employees’ Retirement Systems v. Moody’s Corp., 09-490241, Superior Court of California, County of San Francisco.

--Editors: Peter Blumberg, Mary Romano

To contact the reporter on this story: Karen Gullo in San Francisco at

To contact the editor responsible for this story: Michael Hytha at

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