An attempt by Standard & Poor’s to move a Connecticut lawsuit over its allegedly fraudulent ratings of mortgage-based securities from state to federal court has been denied by a federal judge in Bridgeport, who ordered the agency to pay the state’s legal fees.
The decision by U.S. District Judge Stefan Underhill on Wednesday, April 24 allowed the state Attorney General’s Office to further chide S&P for its conduct. The state’s lawsuit claims S&P defrauded investors between 2004 and 2007 by giving high ratings to investment instruments that were at the heart of the financial crisis.
"We are pleased by Judge Underhill’s decision and are prepared to litigate the matter in Connecticut Superior Court where it belongs," Attorney General George Jepsen said in a prepared statement. "As our complaint alleges, we believe S&P took its own financial interests into consideration when rating structured securities and misrepresented that fact to the public. We intend to pursue our claim vigorously."
Connecticut was the first state to bring claims against the S&P, a McGraw-Hill Co. subsidiary whose analysis and ratings of stocks, bonds and other investment instruments have profound influence on investors. The Connecticut action, filed in 2010, claimed that S&P violated the state’s unfair trade practices act.
On March 6, S&P’s parent company, McGraw-Hill, asked that the lawsuit be moved to federal court. But Underhill said that the defendants waited far too long to make such a request. The time limit is 30 days; Underhill was unpersuaded by S&P’s argument that the clock should have restarted when 13 other states filed similar suits in February 2013.
"Although it may be tempting to find federal jurisdiction every time a multibillion-dollar case with national implications arrives at the doorstep, succumbing to that temptation is barred by the careful limits Congress has placed on the jurisdictional reach of federal courts," Underhill wrote. "With few exceptions, the doors to federal court do not swing open merely because a defendant has a national presence or is alleged to have committed wrongdoing that is national in scope."
Since the Connecticut lawsuit was filed in 2010, a total of 14 other states and the District of Columbia have filed their own lawsuits seeking financial damages. The states and the federal government claims that S&P’s ratings of the mortgage securities was not independent as advertised, but that the high marks were handed out in an attempt to attract the business of investment banks and other financial institutions.
In February, the federal government filed its own lawsuit against S&P in the U.S. District Court for the Central District of California. Tony West, the acting associate attorney general at the Justice Department, said that Standard & Poor’s promised "objective and independent" ratings for residential mortgage-backed securities and collaterized debt obligations. "But the evidence we’ve uncovered tells a different story," West said.
For example, the agency knew it was going to downgrade the ratings on a certain class of mortgage bonds but did nothing to adjust the ratings to reflect that inevitability. "It’s sort of like buying sausage from your favorite butcher, and he assures you the sausage was made fresh that morning and is safe," West said. "What he doesn’t tell you is that it was made with meat he knows is rotten and plans to throw out later that night."
Federal officials say the company’s misdeeds cost investors more than $5 billion and helped to tank the nation’s economy. On Monday, April 22, Standard & Poor’s asked a federal judge in Los Angeles to dismiss the Justice Department’s lawsuit.
In his recent ruling, Underhill did not specify the amount in court expenses S&P should pay to the state for costs it incurred opposing the motion. The amount is to be determined at a later date.
An S&P spokesman, Edward Sweeney, has said that Underhill’s decision won’t apply to cases filed since February by state attorneys general in Arizona, Arkansas, Colorado, Delaware, Idaho, Iowa, Maine, Missouri, North Carolina, Tennessee, Washington and the District of Columbia. Sweeney said the Connecticut lawsuit is without merit.
On May 30, according to published reports, S&P is expected to ask the U.S. Judicial Panel on Multidistrict Litigation to consolidate litigation before a single federal judge. Combining the cases could streamline the litigation and avoid conflicting rulings, analysts say.
Standard & Poor’s and McGraw-Hill are being represented by the New York law firm of Cahill, Gordon & Reindel. Connecticut lawyers listed as part of the defense team include Hartford lawyers John P. D’Ambrosio of Cowdery, Ecker & Murphy, and Karen L. Dowd, of Horton, Shields & Knox.•