Pension Fund Suit against Rating Agencies Dismissed

June 1, 2010 ( - A Manhattan federal judge said it is unfair to hold Moody's Investors Service and Standard & Poor's liable as "underwriters" on securities offerings needing their ratings.

Reuters reports that U.S. District Judge Jed Rakoff issued an opinion detailing reasons behind his March 31 dismissal of class-action claims against the credit rating agencies, and some claims against Bank of America Corp, JPMorgan Chase & Co, and the ABN Amro unit of Royal Bank of Scotland Group Plc. Rakoff rejected fraud claims by investors on the safety of $63.4 billion of mortgage debt.  

He also dismissed the case against Credit-Based Asset Servicing & Securitization LLC, or C-Bass, which packaged debt underwritten by the banks, according to the news report.  

Plaintiffs led by the Public Employees’ Retirement System of Mississippi had accused rating agencies and banks of misleading them about the safety of 84 mostly investment-grade offerings of residential mortgage-backed securities. Rakoff rejected the plaintiffs’ contention that the agencies should be treated effectively as underwriters because their ratings were “necessary” to distribute the securities, Reuters said.  

Rakoff issued his ruling a day before six current and former Moody’s officials, including Chief Executive Officer Raymond McDaniel, testify before the Financial Crisis Inquiry Commission, which is examining causes of the 2008 crisis. The commission will examine credit ratings and how investors use them.  

The case is Public Employees’ Retirement System of Mississippi et al v. Merrill Lynch & Co et al.  

In January, another judge from the same court dismissed a similar lawsuit, saying Moody’s and S&P are not liable under the Securities Act of 1933 as either underwriters or sellers (see Judge Dismisses Ratings Agency Lawsuit).