LOS ANGELES (Legal Newsline) -- A federal judge this week refused to dismiss a lawsuit against The McGraw-Hill Companies Inc. and its subsidiary Standard & Poor's Rating Services by the U.S. Department of Justice.
In his 18-page order Tuesday, Judge David O. Carter for the U.S. District Court for the Central District of California Southern Division blasted the credit ratings agency's "puffery" defense.
"Defendants lead off with a proposition that is deeply and unavoidably troubling when you take a moment to consider its implications," the judge wrote.
"They claim that, out of all the public statements that S&P made to investors, issuers, regulators and legislators regarding the company's procedures for providing objective, data-based credit ratings that were unaffected by potential conflicts of interest, not one statement should have been relied upon by investors, issuers, regulators or legislators who needed to be able to count on objective, data-based credit ratings."
Standard & Poor's, which is being accused of fraud, filed its original motion to dismiss in April. The agency's lead attorney is John Keker of San Francisco-based Keker & Van Nest, who once represented prominent Mississippi attorney Richard "Dickie" Scruggs.
In its suit, the government contends that Standard & Poor's inflated mortgage investment ratings and set them up for a crash.
The agency counters that its claims about its ratings process weren't meant to be taken seriously be investors.
"Despite Defendants' protestations to the contrary, the Court cannot find that all of these 'shalls' and 'must nots' are the mere aspirational musings of a corporation setting out vague goals for its future. Rather, they are specific assertions of current and ongoing policies that stand in stark contrast to the behavior alleged by the government's complaint," Carter wrote.
"Here, the government has alleged with sufficient particularity that S&P's ratings were both objectively and subjectively false. While S&P spends a number of pages challenging the government's facts and arguing that any 'internal squabbles about appropriate rating methodology' would not have resulted in materially false credit ratings, the Court finds that S&P largely identifies disputes of fact that are not appropriately decided at the motion to dismiss stage.
"It is clear that the government's complaint identifies and describes in detail examples of the CDOs (collateralized debt obligations) for which S&P is alleged to have issued or confirmed ratings that did not accurately reflect their true credit risks."
The judge added, "S&P might disagree with the government's version of these facts, but the opportunity to challenge such factual allegations comes later in the litigation process."
Click here to read the judge's full order.
Last month, the U.S. Judicial Panel on Multidistrict Litigation transferred 15 similar lawsuits filed against the credit ratings agency by state attorneys general to a federal court in New York.
From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.