AGs urge federal judge to return cases against Standard & Poor's to state courts

By Jessica M. Karmasek | Aug 19, 2013

NEW YORK (Legal Newsline) -- The attorneys general of 15 states want their cases against The McGraw-Hill Companies Inc. and subsidiary Standard & Poor's Rating Services returned to their respective state courts.

In a consolidated brief filed in the U.S. District Court for the Southern District of New York this month, the states argue that the cases lack federal jurisdiction.

"The States' well-pleaded complaints assert exclusively state law causes of action, and S&P cannot craft federal jurisdiction from affirmative defenses," wrote Olha Rybakoff, senior counsel for Tennessee Attorney General Bob Cooper's office. The office is serving as lead counsel for states Arizona, Arkansas, Colorado, Delaware, Idaho, Indiana, Iowa, Maine, Mississippi, Missouri, North Carolina, Pennsylvania, South Carolina and Washington.

In June, the U.S. Judicial Panel on Multidistrict Litigation transferred the 15 lawsuits filed against credit ratings agency to the New York federal court.

"On the basis of the papers filed and hearing session held, we find that these actions involve common questions of fact, and that centralization of all actions in the Southern District of New York will serve the convenience of the parties and witnesses and promote the just and efficient conduct of this litigation," wrote Kathryn Vratil, acting chairman of the six-member panel and chief judge of the U.S. District Court for the District of Kansas.

The panel said the actions involve "common factual questions," including that the credit ratings agency "intentionally misrepresented" that its analysis of structured finance securities was independent, objective or unaffected by the existence of, or potential for, a business relationship with the issuer of a security.

"Plaintiffs disclaim that their suits question S&P's methodology in rating a security or challenge the correctness of such rating; rather, the crux of the state allegations is that, by misrepresenting factors it considered when analyzing structured finance securities, S&P misleadingly offered a product materially different from what it purported to provide the marketplace," Vratil explained.

"The factual overlap among the actions is unsurprising, given that most actions were filed in state court on the same day in February 2013; additionally, the complaints in each action are highly similar, if not identical in some respects.

"Centralization will eliminate duplicative discovery; prevent inconsistent pretrial rulings on the pending motions to remand as well as other pretrial motions, if necessary; and conserve the resources of the parties, their counsel and the judiciary."

Currently, the suits are being overseen by Judge Jesse Furman.

The states had argued that moving the lawsuits to New York, where the credit ratings agency is based, would inconvenience them, and that transfer is unnecessary in light of the "historic cooperation" among state attorneys general.

"We respectfully disagree that these considerations weigh against centralization in these circumstances," Vratil wrote. "Even though we have never centralized litigation comprised solely of sovereign enforcement actions such as these, centralization is appropriate in light of the significant factual overlap among all actions.

"The inconvenience to S&P of litigating in numerous different districts, as well as state courts, is high, and centralization allows for all parties to obtain substantial efficiencies in dealing with common issues."

In their 34-page consolidated brief, filed Aug. 2, the states argue that their complaints raise only state law claims, which "arise exclusively under state law."

"No federal claims are asserted or necessarily raised," the attorneys general wrote.

Also, they argue that the purported federal issues raised by Standard & Poor's are "not substantial."

"S&P's preemption and First Amendment arguments are nothing more than federal defenses to the States' claims, which cannot independently provide a basis for federal jurisdiction," they wrote.

"Additionally, substantiality is not met merely because multiple States brought enforcement actions against S&P."

The attorneys general also contend that comity principles support the federal court declining jurisdiction and remanding the lawsuits back to their state courts.

"Considerations of state sovereignty and the balance of federal and state judicial responsibilities clearly favor state courts interpreting state law in the enforcement proceedings brought by the sovereign States," they wrote.

Click here to read the complete brief.

Most of the 15 state lawsuits were filed on the same day in February that the U.S. Department of Justice filed its own lawsuit against Standard & Poor's.

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

In its suit, the government contends Standard & Poor's inflated mortgage investment ratings and set them up for a crash.

In particular, it claims 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.

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

The DOJ suit is being overseen by a judge for the U.S. District Court for the Central District of California.

In July, Judge David O. Carter refused to dismiss the DOJ lawsuit, blasting 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.

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

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