Credit Rating Agencies Face Second Lawsuit by Public Pension Fund

July 30, 2009 ( - A second state pension plan has sued the top credit rating agencies for misleading investors by giving high ratings to subprime mortgage-backed securities.

Courthouse News Service reports that in the latest action, filed in U.S. District Court for the Eastern District of New York, the Public Employees’ Retirement System of Mississippi has charged Moody’s Investor’s Service, Fitch Ratings and Standard & Poor’s with assigning “defective” ratings on mortgage pools that relied on “inadequate and antiquated” rating models that considered historical data that was outdated when more modern methods were available. The class claims that Moody’s, the Fitch Group, and McGraw-Hill Cos., owner of Standard & Poor’s, cost investors billions of dollars by failing to investigate the trustworthiness of statements issued by J.P. Morgan Acceptance Corp.

The pension plan says the rating agencies at best neglected their fiduciary responsibilities by not accurately rating pre-structured mortgage-backed securities, but instead starting with the rating that was requested by the certificate issuer, and building a deal around it, according to the news report.

The three agencies face similar charges in a lawsuit brought earlier this month by the California Public Employees Retirement System (see CalPERS Says Losses Caused by Inaccurate Credit Ratings ).

In testimony before a U.S. House committee, a third public pension system, the Colorado Public Employees’ Retirement Association, asked Congress to increase rating agencies’ accountability (see CO PERA Wants Increased Oversight of Rating Agencies ).

In a request for comment on proposed rules for money market funds, the Securities and Exchange Commission also asked the public to comment on the role of credit rating agencies in money market fund regulation (see SEC Proposes Money Market Funds Improvements ).