McGraw-Hill Cos. (MHP:US)’s Standard & Poor’s unit and Ambac Financial Group Inc. (ABKFQ:US) must face claims of negligent misrepresentation and unfair business practices in a lawsuit alleging they conspired to force local governments in California to purchase bond insurance they didn’t need.
State court Judge Richard Kramer in San Francisco said today the California entities presented sufficient evidence to pursue certain claims in the lawsuit. He didn’t rule on the merits of the case.
Los Angeles, San Francisco and other municipal entities and local businesses allege ratings companies and bond insurers worked together to improperly maintain high credit ratings for the insurers when they knew such ratings weren’t warranted and perpetuate a dual credit-rating system that punished cities with lower ratings than corporate entities.
The plaintiffs say they spent millions of dollars to purchase insurance to enhance the credit ratings of their bonds, while S&P was giving its highest ratings to the risky subprime mortgage-backed securities the bond insurers were backing. When the mortgage crisis occurred in 2008, the bonds became unmarketable and cities racked up millions of dollars in fees to support them, according to the the complaint.
“This is a huge victory for California cities,” Joseph Cotchett, who represents the municipalities, said after the hearing.
Scott Cooper, an attorney for Ambac, said he would appeal the ruling. Ed Sweeney, a spokesman for New York-based S&P, didn’t immediately return an e-mail after regular business hours seeking comment about the decision.
Kramer previously ruled that the California plaintiffs couldn’t pursue claims that the defendants violated state antitrust laws.
Moody’s Corp. and Fitch Ratings Ltd. were dropped as defendants in the case, Cotchett said today. Claims against them were “resolved,” he said, declining to provide details. Daniel Noonan, a Fitch spokesman, and Michael Adler, a Moody’s spokesman, didn’t immediately respond to e-mail messages seeking comment on the development.
S&P also faces claims by the U.S. government in federal court in Santa Ana, California, alleging that the company’s mortgage-backed securities ratings were fraudulent. S&P today filed court papers asking a judge to dismiss the case.
In that case, the U.S. accused S&P in a Feb. 4 complaint of inflating grades on mortgage-backed securities to win business, helping trigger the worst financial crisis since the Great Depression.
The U.S. is seeking as much as $5 billion in damages in its lawsuit. S&P rated more than $2.8 trillion of residential mortgage-backed securities and about $1.2 trillion of collateralized-debt obligations from September 2004 through October 2007, according to the U.S. complaint.
The case is Ambac Bond Insurance Cases, CJC-08-004555, Superior Court of California, County of San San Francisco (San Francisco).
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