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Tuesday, April 7, 2020

Ratings agencies point to Second Circuit decision while fighting Cordray's case

By John O'Brien | Sep 19, 2012


CINCINNATI (Legal Newsline) - Credit ratings agencies sued by former Ohio Attorney General Richard Cordray are saying an appeals court's recent decision bodes well for them.

A unanimous decision by the U.S. Court of Appeals for the Second Circuit in New York in favor of two ratings agencies proves that the three ratings agencies sued by Ohio owed no duty to the State, they argued Aug. 24. Cordray said five public pension funds lost at least $457 million because the ratings firms marketed mortgage-backed securities by giving them high risks.

Now the head of the federal Consumer Financial Protection Bureau, Cordray, through private law firms, filed a lawsuit against Standard & Poor's, Moody's Investors Service and Fitch Ratings in November 2009. A year later, he lost the Ohio AG election to Republican Mike DeWine.

U.S. District Judge James Graham granted the firms' motion to dismiss in September 2011. Attorney Roberta Kaplan notified the Sixth Circuit judges deciding the case to the Second Circuit's Aug. 14 decision in Anschutz Corp. v. Merrill Lynch & Co.

"(A) unanimous panel of the Second Circuit applying New York law affirmed the dismissal of negligent misrepresentation claims against the two rating agencies in that case on the ground that the plaintiff had no adequately alleged that those defendants owed it any duty," Kaplan wrote.

"Like the Plaintiffs-Appellants here, Anschutz - a "qualified institutional buyer" - asserted that the rating agencies owed it a duty notwithstanding that it had not alleged any direct contact with those defendants.

"The Second Circuit held that under such circumstances, the complaint did not 'remotely satisfy the New York standard (for establishing a duty or special relationship)."

Cordray alleged 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 misrepresentations that led to the five Ohio funds making 308 investments in mortgage-backed securities from 2005-08.

The agencies said they did not owe any duty to Ohio's pension funds.

"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."

Moody's and McGraw-Hill Cos., which owns Standard & Poor's, were defendants in the Second Circuit case. A Merrill Lynch shareholder brought the lawsuit over auction rate securities.

In a response filed Friday, Steven Fineman of Lieff Cabraser Heimann & Bernstein wrote that the agencies' reliance on the Anschutz decision is wrong for two reasons.

The first is, he said, the Second Circuit viewed New York law too restrictively, and that he has no found no New York appellate authority imposing a "direct contact" requirement. The decision, he added, did not cite any, either.

Secondly, the decision is not relevant, he wrote, because Ohio's case is not governed by New York law.

"The Ohio funds' briefing to the district court shows that, to the extent this court can make a choice-of-law determination on the current record, it should deem Ohio law controlling," he wrote.

Other firms hired by Cordray were 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.

The Sixth Circuit has already heard oral arguments.

From Legal Newsline: Reach John O'Brien at

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