Attorneys general of 15 states are fighting for a return to state courts lawsuits alleging that Standard & Poor's Financial Services issued inflated ratings for mortgage-backed securities leading up to the recession.

In multidistrict litigation pending in federal court in New York, Olha Rybakoff, senior counsel for Tennessee Attorney General Robert Cooper Jr., filed a consolidated brief on behalf of 14 of those states arguing that their complaints should be sent back to state courts, where they originally were filed.

S&P, owned by McGraw Hill Financial Inc., is expected to oppose that motion by Aug. 23, and Judge Jesse Furman (See Profile) of the Southern District of New York has scheduled an Oct. 4 hearing on the issue.

"As the states argue in their brief, state sovereignty is at the heart of this issue, and it's important for state attorneys general to be able to enforce their state consumer protection statutes in their own state courts," said Rybakoff, the states' lead counsel in the multidistrict litigation.

Meantime, California Attorney General Kamala Harris is attempting to block S&P's move to dismiss her separate case, filed on Feb. 5 on behalf of pension funds for state employees and teachers that purchased billions of dollars of the rated securities. On Monday, San Francisco Superior Court Judge Curtis Karnow heard oral arguments on S&P's demurrer.

S&P attorney Floyd Abrams of Cahill Gordon & Reindel declined to comment.

The cases all assert that S&P's ratings of mortgage-backed securities were neither impartial nor objective because the agency was obtaining lucrative fees from investment bank clients. The U.S. Judicial Panel for Multidistrict Litigation coordinated the attorneys general actions in 14 states and the District of Columbia for pretrial purposes in June (NYLJ, June 20). Many attorneys general had argued against coordinating the cases while their motions to remand were pending.

The panel also coordinated two related declaratory actions brought by S&P against the states of South Carolina and Tennessee. The other 12 states are Arizona, Arkansas, Colorado, Delaware, Idaho, Iowa, Maine, Mississippi, Missouri, North Carolina, Pennsylvania and Washington. Indiana Attorney General Greg Zoeller's case against S&P, filed on June 17, was added to the coordinated litigation on Aug. 1. The District of Columbia has not joined in the consolidated brief, but its case presumably would be remanded should Furman rule against S&P.

On July 16, Furman ordered both sides to submit briefing on the pending motions to remand.

In the states' consolidated brief, Rybakoff wrote that the attorneys general retain sovereignty over cases involving their own state consumer protection statutes. Furthermore, she wrote, S&P, whose "jurisdictional maneuvering" has delayed proceedings in the cases, has no right to remove the litigation to federal courts based on potential defenses asserting the First Amendment and federal pre-emption under the U.S. Securities & Exchange Commission's regulations and the Credit Rating Agency Reform Act of 2006.

Mississippi Attorney General Jim Hood filed a separate brief supporting remand of his case, which also names Moody's Corp. and Moody's Investors Services Inc. S&P also sought to remove that case to federal court based on the Class Action Fairness Act.

Cooper and South Carolina Attorney General Alan Wilson also moved to dismiss S&P's declaratory actions against them, calling those filings a "race to the courthouse."

The U.S. Justice Department, which is not a party to the multidistrict litigation in New York, filed a statement of interest supporting remand of the attorneys general actions.

"The United States has a particular interest in ensuring that the States' cases are not improperly removed given the pendency of its own litigation against S&P, filed in coordination with the initiation of the State Actions, on what are truly federal claims," the Aug. 2 filing says.

The Justice Department's suit, filed on Feb. 4, seeks $5 billion in civil penalties under the Financial Institutions Reform, Recovery and Enforcement Act of 1989.

U.S. District Judge David Carter in Santa Ana, Calif., refused to dismiss the Justice Department's case against S&P on July 16, concluding that its statements to consumers were not mere "puffery."

In the California case, S&P, represented by Melvin Goldman, a senior partner at Morrison & Foerster, has argued that its offering materials are not "claims" under the California False Claims Act. Even if they were, the state's allegations are barred by a statute of limitations, he wrote. The attorney general, in response, defended the allegations, adding that her office did not learn of certain facts supporting false claims until 2008.

Two other actions against S&P by attorneys general are pending in state courts in Illinois and Connecticut. On March 6, both cases were removed to federal courts.

But on April 24, U.S. District Judge Stefan Underhill remanded Connecticut Attorney General George Jepsen's case to Connecticut Superior Court, and U.S. District Judge Matthew Kennelly remanded Illinois Attorney General Lisa Madigan's case on May 2.