Richard Blumenthal (D-Conn.)
Richard Cordray (D-Ohio)
NEW YORK (Legal Newsline)-Wall Street credit rating giants Moody's Investors Service and Standard & Poor's were sued Wednesday by Connecticut Attorney General Richard Blumenthal, marking the second state action against the firms over their ratings to investments backed by subprime loans.
Blumenthal, a Democrat, alleges that the companies provided "tainted ratings" to investors, saying that their malfeasance allowed many investors' portfolios to be chock-full of risky securities.
He is alleging violations of the state's Unfair Trade Practices Act. For their part, Moody's and S&P have denied any wrongdoing.
"Moody's and S&P violated public trust--resulting in many investors purchasing securities that contained far more risk than anticipated and that have ultimately proven to be nearly worthless," Blumenthal said in a statement.
The companies' motive, according to Blumenthal: greed. He said their judgment was clouded by the lucrative fees the firms received for rating the risky securities.
The lawsuit against Moody's Corp., the parent of Moody's Investors Service, and McGraw-Hill Cos., the parent of Standard & Poor's, was filed in Hartford, Conn.
"Our investigation is ongoing; however, our most compelling and overwhelming evidence of violations at this point is against Moody's and S&P," Blumenthal added.
In November, Ohio Attorney General Richard Cordray, also a Democrat, filed a lawsuit against Standard & Poor's, Moody's and Fitch Ratings on behalf of five Ohio public-employee pension funds.
Cordray accused the firms "wreaking havoc on U.S. financial markets by providing unjustified and inflated ratings of mortgage-backed securities in exchange for lucrative fees from securities issuers."
He alleged that the three bond rating agencies cost the pension funds more than $457 million.
Also last year, California Attorney General Jerry Brown, a Democrat, subpoenaed Moody's, Standard & Poor's and Fitch Ratings.
He said at the time he was seeking to determine how much and when the companies knew about the creditworthiness of high risk mortgage-backed securities.
From Legal Newsline: Reach staff reporter Chris Rizo at chrisrizo@legalnewsline.com.