Credit rating agencies settle with Connecticut
HARTFORD, Conn. (Legal Newsline) - Connecticut Attorney General George Jepsen announced settlements on Friday with three major credit rating agencies to resolve allegations that the companies misrepresented their public bond credit ratings.
As part of the settlements with Moody's Investor Services Inc., Standard & Poor's, and Fitch Inc., the rating agencies will credit the state approximately $900,000 which will be used to offset the expense of obtaining future credit ratings on sales of state bonds, a direct cost savings to the state. The state's lawsuits against the agencies were the first of their kind brought by a state or federal enforcement agency.
The state's complaints alleged that because of the unfair and deceptive trade practices by the credit rating agencies, the state and its cities, towns and school districts paid higher interest rates than they should have on the bonds they issued and also bought unnecessary bond insurance. The state and its cities and towns issue bonds to pay for schools, roads and other important public projects.
The complaints alleged that public bonds frequently received lower credit ratings than corporate bonds, even though the rating agencies' own studies showed that public bonds were far more likely to be paid back than their corporate counterparts. As part of the settlements, the rating agencies denied that they violated any laws but agreed to the settlements to avoid the uncertainty and expense of litigation.
Subsequent to the filing of the lawsuits, the three agencies reformed how they rate public bonds in the U.S. These reforms have resulted in higher credit ratings and corresponding lower interest rates for many Connecticut cities and towns.
In addition, a key reform sought by the state's lawsuits was included in the federal Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted after the lawsuits on July 21, 2010. The Dodd-Frank Act now requires that rating agencies clearly define the meaning of their rating symbols and to apply such symbols consistently across all securities, including public and corporate bonds for which the symbols are used.
As part of the settlement, Moody's, S&P and Fitch have also agreed to meet with public bond issuers in Connecticut to explain their credit rating scales and the factors the rating agencies look at when rating public bonds in Connecticut.
Jepsen's office credited the agencies for making significant changes to the process by which they assign ratings to publicly issued bonds.
The state filed separate lawsuits against Moody's and S&P in March 2010 related to alleged misrepresentations the companies made about their analysis of structured finance securities. These lawsuits are unaffected by these settlements and are pending in Connecticut Superior Court.