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As the Litigation Daily has chronicled over the years, the credit rating agencies have until recently enjoyed a rather charmed passage through our courts, with various judges deciding they deserve First Amendment protection against claims that they issued defective ratings.

Then, two weeks ago, a major milestone was reached. Standard & Poor’s Rating Services and Moody’s Investors Service decided for the first time to pay up and settle allegations over their flawed ratings of subprime securities. With trial quickly approaching, the defendants agreed to shell out a reported $225 million to resolve two suits brought by investors who claim they lost hundreds of millions of dollars in a couple of investment vehicles called Cheyne Finance and Rhinebridge that crashed in 2007.

As it turns out, the payout to investors may be a minor inconvenience compared to what one of the credit rating companies now faces: a massive civil fraud suit filed by the Department of Justice against S&P in February. And it’s possible that the government would never have filed the suit if S&P and its co-defendants hadn’t been so confident in the Cheyne and Rhinebridge cases.

In Cheyne and Rhinebridge, the defendants faced a situation where their usual First Amendment defense didn’t work. The plaintiffs lawyers, led by Robbins Geller Rudman & Dowd, convinced U.S. District Judge Shira Scheindlin in Manhattan not to grant the defendant’s motion to dismiss. She ruled in 2009 that because the ratings given to the mortgage-backed securities at issue were aimed a limited group of investors, and not to the public at large, the First Amendment didn’t apply.

It was obviously a setback for the ratings agencies. But the defendants, perhaps emboldened by their success in similar cases in the U.S. Court of Appeals for the Second Circuit, pressed on. They defeated the plaintiffs’ attempt to get class certification, and in early 2012 they filed motions for summary judgment. That’s when the case took an unusual twist.

When the plaintiffs responded to that motion, they asked Schiendlin to unseal evidence that had been covered by a protective order. They argued that under a 2006 Second Circuit case called Lugosch v. Pyramid Co. of Onondaga, documents filed in connection with a summary judgment ruling are considered judicial documents, and should be made available to the public. The judge agreed, and last June the plaintiffs filed a response that included more than 400 exhibits they had unearthed in document discovery and depositions. For instance, an S&P executive testified that that the model used to analyze residential mortgage-backed securities was only marginally more accurate than "if you just simply flipped a coin."

Some of the most potentially incriminating material ended up in The New York Times just a few days later, and Schiendlin ultimately cited the evidence when she refused to grant the defendants’ summary judgment motions. (She later allowed the defendants to file a new summary judgment motion challenging the plaintiffs’ theory of loss causation, which was pending when the case settled.)

The plaintiffs team at Robbins Geller, which was led by Daniel Drosman, Luke Brooks and Darryl Alvarado, told me the agencies should have anticipated that the evidence would go public. "We were quite surprised that the defendants allowed the cases to proceed to a point where publication of those incriminating documents became inevitable under the Second Circuit’s Lugosch decision," they said.

More troublesome for the ratings agencies, seven months later the DOJ launched its civil suit against S&P. I don’t know if the government was prompted by the public revelations in the Cheyne and Rhinebridge cases, but the government’s complaint does cite evidence revealed by the private plaintiffs.

We’ll see where the DOJ’s case goes. (Floyd Abrams at Cahill Gordon & Reindel, who represents S&P, didn’t respond to a call seeking comment.) Regardless of whether the government’s legal theories stick, those unsealed filings in Cheyne and Rhinebridge will always be public. And they’ll always be a reminder of the rating agencies role in allowing the financial crisis to unfold.

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