Federal court rules for credit rating agencies

CINCINNATI - A federal appeals court has sided with three major credit rating agencies in ruling against Ohio pension funds regarding mortgage debt.

The 6th U.S. Circuit Court on Monday upheld a 2011 dismissal of a lawsuit filed against Moody's Corp's Moody's Investors Service, McGraw-Hill Cos' Standard & Poor's and Fimalac SA's Fitch Ratings.

Five pension funds -- including the Ohio Police & Fire Pension Fund -- said they lost $457 million on 308 investments in mortgage debt from 2005 to 2008 based on flawed and inflated triple-A ratings.

The three-judge court was unanimous in deciding that Ohio didn't show the ratings agencies should be held liable under Ohio law.

"Based on publicly available information describing the agencies' business practices, the funds draw the inference that the agencies did not believe in the correctness of their ratings with respect to any mortgage-backed securities the funds purchased over a three-year period," Circuit Judge Julia Smith Gibbons wrote in the ruling. "That inference is an unreasonable one."

The case was filed in 2009 by former Ohio Attorney General Richard Cordray. He currently is the director of the federal Consumer Financial Protection Bureau.

The Circuit Court's opinion upheld District Judge James Graham's ruling and kept his dismissal of the case with prejudice, so the case can't filed again.

"The rating agencies rightly argue that they were not the sellers of the securities purchased by the Ohio funds," Graham wrote in his decision. "This leaves the Ohio funds to argue that the rating agencies are liable because they 'received(d) the profits accruing from such sale.'

"The Ohio funds contend that the rating agencies received profits because 'the rating agencies did not receive their full fees for a deal unless the deal was completed and the requested rating was provided.' Elsewhere, the complaint alleges that the rating agencies were not paid unless the 'target rating was attained' and 'the credit rating was issued.'

"The Ohio funds' argument has no merit because the language of the statute plainly requires that the profits accrue from the sale of securities, not from work performed in preparation for a securities offering, if the fee is not contingent upon an actual sale."

6th U.S. Circuit Court of Appeals case number 11-4203