Justice Martin Jenkins, California Court of Appeal for the First District
Justice Martin Jenkins, California Court of Appeal for the First District (Jason Doiy / The Recorder)

SAN FRANCISCO — Lawyers for CalPERS are cheering a state appellate ruling they hope has set them up for a win in a long-running suit against Moody’s Investors Service Inc. and Standard & Poor’s.

A First District Court of Appeal panel ruled unanimously Tuesday that the California Public Employees’ Retirement System may proceed with its 2009 case against the rating agencies for allegedly inflating credit ratings for certain structured investment vehicles and enticing the pension fund to sink money into risky investments.

Defense lawyers at Wilson Sonsini Goodrich & Rosati and Perkins Coie had argued the suit should be thrown out under California’s anti-SLAPP statute, but Justice Martin Jenkins agreed with the lower court that CalPERS has put forth a strong enough case to overcome that attack.

“At this early stage of the proceedings, dismissal pursuant to the anti-SLAPP statute is not warranted,” Jenkins wrote, concluding that CalPERS had demonstrated a probability of prevailing on the merits on each prong of its claim of negligent misrepresentation.

CalPERS lawyer Todd Seaver, a partner at Berman DeValerio, said the opinion is especially encouraging because it validates the same evidence plaintiffs will present at trial.

“Those facts aren’t going away,” Seaver said, adding, “We’d like to see Moody’s and Standard & Poor’s throw in the towel, but I don’t think they will. So what the ruling does is set up the case very well going forward.”

Moody’s lawyer, Wilson Sonsini partner Keith Eggleton, referred comment to his client, who could not immediately be reached.

CalPERS argues the rating agencies bestowed inflated scores on structured investment vehicles knowing they were really “stuffed full of toxic subprime mortgages” and home equity loans. The pension fund wound up taking losses that could amount to more than $1 billion, according to the complaint.

In 2010, the rating agencies filed a motion to strike the complaint under the state’s anti-SLAPP statute, a measure that shields parties from frivolous lawsuits that would chill activities protected by the First Amendment. The defendants argued that by issuing the ratings in question, they were furthering their constitutional right of free speech in connection with a public issue.

San Francisco Judge Richard Kramer agreed­—to a point. He found the claims against the rating agencies arose from protected activity. However, he subsequently ruled that CalPERS had shown a probability of prevailing on its claims, which blocked the anti-SLAPP defense.

In its 43-page opinion, the panel, comprised of Jenkins, William McGuiness and Peter Siggins, upheld Kramer’s ruling in its entirety.

“[T]he record supports the inference that the ratings were not merely predictions regarding the [structured investment vehicle's] future value, but affirmative representations regarding the present state of their financial health,” Jenkins wrote, “and, more specifically, regarding their capacity to provide payments to investors as promised (which capacity they did not in fact have).”

CalPERS offered evidence that the rating agencies were motivated to inflate their ratings, because the agencies were paid only if the deal closed, Jenkins wrote. Despite being a sophisticated investor, CalPERS showed that it relied on the ratings because structured investment vehicles, or SIVs, “existed in a ‘shroud of secrecy,’” he stated.

“Very few persons, even within the agencies themselves, were privy to the SIV’s composition,” Jenkins wrote. “As such, it is hardly surprising that the relevant investor class may have significantly relied on the ratings.”

Contact the reporter at mkendall@alm.com.