Plaintiffs Inch Forward in Rating Agency Litigation

There is plenty of blame to go around in the credit crisis, and many investors and public officials have been placing it on the credit rating agencies that gave AAA ratings to some of the mortgage-backed financial instruments that allegedly contributed to billions in investor losses.

Attorneys general in Connecticut and Ohio have sued the big three rating agencies--Standard & Poor's, Moody's and Fitch--and, in May, New York Attorney General Andrew Cuomo's office was revealed to be investigating the relationship between the ratings agencies and certain banks that peddled mortgage-backed securities. (Cuomo settled an investigation into the rating agencies' conduct leading up to the sub-prime mortgage meltdown in 2008.) Moody's just disclosed that it received a Wells notice indicating a forthcoming SEC action. And more stringent regulation of the rating agencies is part of the financial reform package the Senate just passed.

Scheindlin didn't buy the defense, writing in an April 26 order, "To hold that plaintiffs failed to plead loss causation solely because the credit crisis occurred contemporaneously with Rhinebridge's collapse would place too much weight on one single factor and would permit S&P and Moody's to blame the asset-backed securities industry when their alleged conduct plausibly caused at least some proportion of plaintiffs' losses."

The ruling is a big blow to the "broader credit crisis" defense being raised at the motion to dismiss stage in these suits (see "Elephant in the Room").

Associate Editor

Melissa Maleske

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