COLUMBUS, Ohio (Legal Newsline) - The three major credit rating agencies have won a lawsuit filed by former Ohio Attorney General Richard Cordray, who is President Barack Obama's pick to head a key consumer protection post.
In Cordray's lawsuit, filed in November 2009, he blamed the agencies for helping cause the collapse of the housing and credit markets. U.S. District Judge James Graham wasn't buying his arguments and on Sept. 26 granted a motion to dismiss filed by Standard & Poor's, Moody's Investors Service and Fitch Ratings.
Cordray hired private attorneys to file the suit on behalf of five Ohio public pension funds that claimed they lost at least $457 million as a result of the agencies' actions.
"The rating agencies' total disregard for the life's work of ordinary Ohioans caused the collapse of our housing and credit markets and is at the heart of what's wrong with Wall Street today," Cordray said in 2009 when he announced the lawsuit.
Currently, Obama's nomination of Cordray to head the Consumer Financial Protection Bureau is a point of contention between Republicans and Democrats in the U.S. Senate. The Senate Banking Committee voted along party lines earlier this month to approve the nomination but Republicans are likely to put up a fight when the vote goes to the full Senate.
When Obama nominated Cordray, he noted that the financial crisis was not the result of a normal economic cycle, but that there were abuses and a lack of "smart regulations."
In his lawsuit, Cordray said the rating firms marketed mortgage-backed securities by giving them the highest ratings and lowest risk. He said the agencies put high ratings on toxic mortgage debt in return for high fees paid by those they were rating.
He alleged the agencies violated the Ohio Securities Act and committed negligent misrepresentation. The five Ohio funds made 308 separate investments in mortgage-backed securities from 2005-08.
"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."
On one of Cordray's other securities violations claims, Graham wrote that the funds needed to prove a predicate violation was made by a seller and that the rating agencies were also liable because they aided in the sale.
"The complaint identifies who the issuers of the securities were, but it does not contain even a general allegation that the issuers violated the Ohio Securities Act, let alone plead a violation with particularity," Graham wrote.
"Moreover, the complaint does not allege that the issuers were the actual sellers, nor does it identify any underwriters, placement agents, investment managers or brokers who may have been involved in the sales transactions."
Graham also rejected the negligent misrepresentation claim made by Cordray, who said the agencies failed in their duty to act with reasonable care in assigning their credit ratings and that they failed to manage and disclose conflicts of interest. Cordray also said they used faulty models to determine their ratings and failed to adequately monitor ratings.
The two sides argued whether the New York or Ohio standard of the claim should be used, but Graham said the funds' argument failed on both.
Graham said the funds needed to prove that a "special relationship" existed between them and the rating agencies, and that none existed.
"There is no allegation that the parties had any direct communication, nor is it alleged that the rating agencies knew or foresaw that the Ohio funds in particular would be relying on their ratings," he wrote.
The rating agencies also did not supply false information when it assigned credit ratings, Graham said.
"(P)redictions about the future and statements of opinion are generally not actionable," he wrote.
In November, Cordray lost to former Lt. Gov. and U.S. Sen. Mike DeWine, a Republican who inherited the lawsuit, in the state attorney general race. He had been elected to the post in November 2008 to serve the remainder of the term held by the previous attorney general, Marc Dann. Dann had resigned in May 2008 amid a sex scandal.
Prior to being attorney general, Cordray served as the Ohio State Treasurer and as treasurer of Franklin County, Ohio. He also served as a member of the Ohio House of Representatives and as the state's first solicitor.
The private firms hired by Cordray for the lawsuit were: Lieff, Cabraser, Heimann & Bernstein of New York; Entwistle & Capucci of New York; and Schottenstein Zox & Dunn of Columbus.
Employees of the Lieff firm gave $50,000 to the Ohio Democratic Party in 2008. The party gave Cordray more than $1.8 million for his campaign that year.
The Schottenstein firm gave $23,500 to Cordray from 2008-10.
Tuesday, the National Association of Attorneys General threw its support behind Cordray's nomination.
Thirty-seven attorneys general signed a letter sent to senators. It noted his action against the credit rating agencies.
"Some of us may disagree with aspects of the Dodd-Frank legislation. But we are united in our belief that Mr. Cordray is very well qualified to carry out the responsibilities of this position," says the letter sent to Senate Majority Leader Harry Reid and Senate Minority Leader Mitch McConnell.
The attorneys general say they believe Cordray has the knowledge, experience and leadership skills to serve. "He is both brilliant and balanced," they wrote.
"For the past several months he has served as the CFPB's director of enforcement. Immediately before taking that position, Mr. Cordray served two years as Ohio attorney general. In both roles, he earned a reputation as a strong advocate for the interests of consumers," says the letter.
"As attorney general of Ohio, he took a national leadership role in dealing with the Wall Street crisis. Mr. Cordray dealt with all the leading players, including Wall Street firms, banks, credit rating agencies and subprime mortgage lenders. In these actions he not only defended consumers but also worked to find fair and reasonable solutions for the financial industry."
From Legal Newsline: Reach John O'Brien by e-mail at firstname.lastname@example.org.