The California Public Employees’ Retirement System (CalPERS) has won a $130 million settlement from Moody’s, stemming from Moody’s Investors’ Services erroneous “AAA” ratings of certain investments that performed very poorly during the 2008 and 2009 financial crisis.
Early in 2015, CalPERS settled with separate defendant Standard & Poor’s for $125 million, bringing total recovery from the now-concluded lawsuit to $255 million.
“This resolves our lawsuit against Moody’s and restores money that belongs to our members and employers,” explains Matthew Jacobs, general counsel for CalPERS. “We are eager to put this money back to work to help ensure the long-term sustainability of the fund.”
CalPERS sued Moody’s and other rating agencies in 2009 after the mega-pension sustained losses from investments in three structured investment vehicles that relied on the liquidity of assets that turned out to be much more illiquid than portrayed by their sellers/raters, such as subprime retail mortgage backed securities, collateralized debt obligations and other asset-backed securities. In the initial lawsuit, CalPERS alleged that Moody’s made “negligent misrepresentations by assigning the investments their highest credit rating.”
“This caused significant losses as the market for structured finance securities collapsed in late 2007,” CalPERS explains. “In addition to obtaining a substantial recovery for investment losses, this case was path-breaking in that the settlements rank as the largest known recovery from Moody’s and S&P in a private lawsuit for civil damages. The case also established through a landmark appellate court decision that rating agencies can be liable for negligent misrepresentations under California law for their ratings of privately-placed securities.”
Jacobs says he hopes the settlement will “serve as a cautionary reminder to all investors that rely on rating agencies to guide their investments.
A Moody’s spokesperson tells PLANSPONSOR the resolution of this long-running litigation, “which concerns three structured investment vehicles that Moody’s rated in 1995, 2002 and 2005, is in the best interest of our company and its shareholders.”
More information about the $285-billion pension fund is at www.calpers.ca.gov.