S&P pushes federal judge to dismiss lawsuit filed by DOJ, state AGs

By Jessica M. Karmasek | Jun 5, 2013

LOS ANGELES (Legal Newsline) -- The McGraw-Hill Companies Inc. and its subsidiary Standard & Poor's Rating Services is pushing a federal judge to dismiss a lawsuit filed against it by the U.S. Department of Justice and a group of state attorneys general.

The credit ratings agency, which is being accused of fraud, filed its 21-page reply in support of its motion to dismiss the DOJ's complaint in the U.S. District Court for the Central District of California Monday.

Standard & Poor's filed its original motion to dismiss in April.

In its newest filing, the credit ratings agency's lead attorney, John Keker of San Francisco-based Keker & Van Nest, said the DOJ's complaint "fundamentally fails" to state a claim.

And the government's opposition -- filed May 20 -- "does not cure its flaws," wrote Keker, who also was the attorney for prominent Mississippi attorney Richard "Dickie" Scruggs during two judicial bribery cases.

"It simply exposes them," he wrote of the DOJ's most recent filing in the case.

Keker argues that statements about the ratings agency's independence and objectivity -- included in its codes of conduct -- cannot form the basis of a fraud claim.

"This Court should not credit the Government's feigned surprise at the notion that S&P's statements about its corporate goals and objectives do not give rise to a fraud claim," he wrote. "As the Government's counsel are well aware, S&P relies on well-established federal law that has been confirmed and applied by federal judges around the nation at the motion to dismiss stage -- including a recent Second Circuit ruling dismissing a fraud action against S&P based on the very documents relied on in this case.

"In fact, since nearly every company in the United States has a code of conduct, the proposition that any corporate conduct inconsistent with those codes can constitute criminal fraud is particularly far-fetched."

Read Standard & Poor's full reply here.

The DOJ and a group of 13 states -- including Arizona, Arkansas, California, Colorado, Delaware, Idaho, Iowa, Maine, Missouri, North Carolina, Pennsylvania, Tennessee and Washington -- and the District of Columbia sued the ratings agency in February.

The DOJ and the states allege that the agency's misconduct involved structured finance securities backed by subprime mortgages that were at the heart of the nation's financial crisis.

In their suit, the government and the states contend that Standard & Poor's inflated mortgage investment ratings and set them up for a crash.

In particular, they claim that the agency -- from September 2004 through October 2007 -- "knowingly and with the intent to defraud, devised, participated in and executed a scheme to defraud investors" in certain mortgage-related securities.

They also claim Standard & Poor's falsely represented that its ratings were "objective, independent, uninfluenced by any conflicts of interest."

Connecticut, Illinois and Mississippi have filed their own, similar lawsuits against the ratings agency.

Connecticut sued Standard & Poor's and its parent in March 2010.

Illinois also filed its own suit against the ratings agency last year.

Mississippi Attorney General Jim Hood has had his own consumer protection lawsuit pending against Standard & Poor's, as well as its chief competitor, Moody's Investors Service Inc., since 2011.

According to the case docket, Judge David O. Carter has scheduled a July 8 hearing to listen to arguments from both sides and decide whether to dismiss the lawsuit.

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.

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