The decision Monday by the U.S. Court of Appeals for the 6th Circuit in Cincinnati affirms a ruling by a trial judge who dismissed a lawsuit by five pension funds for public employees in Ohio. The lawsuit accused Standard & Poor's, Moody's and Fitch with assigning ratings to securities that misled investors.
The pension funds alleged in a lawsuit filed in November 2009 that they lost $457 million in connection with 308 mortgage-backed securities—all with an AAA rating from the agencies—that they bought over a roughly three-year period starting in 2005.
In their lawsuit, the funds claimed that the agencies had misrepresented their independence from the banks that sold the securities. "The rating agencies subverted those principles and negligently provided unjustified and inflated ratings in exchange for the lucrative fees that the [asset-backed securities] issuers paid the defendants for not only rating the securities but also for helping to structure them," the lawsuit claimed.
The Court of Appeals agreed with Judge James Graham of the U.S. District Court for the Southern District of Ohio, who ruled in September 2011 that the agencies had not sold the securities and that the agencies lacked any legal responsibility to the funds under state law.
"Based on publicly available information describing the agencies' business practices, the funds draw the inference that the agencies did not believe in the correctness of their ratings with respect to any [mortgage-backed securities] the funds purchased over a three-year period," Judge Julia Smith Gibbons wrote for a unanimous three-judge panel of the appeals court. "That inference is an unreasonable one."
"General criticism of business practices does not provide a basis for concluding that the agencies made actionable misrepresentations on any particular occasion," Gibbons added.
The Ohio Attorney General’s office is reviewing the decision.
"We are pleased that the Court of Appeals unanimously affirmed the dismissal of all of the plaintiffs' claims including negligent misrepresentation," Standard & Poor's spokesman Ed Sweeney said in an email. The decision "affirms our views on the standards by which rating agencies should be judged," Fitch spokesman Daniel Noonan said in an email. Michael Adler, a spokesman for Moody's, also expressed contentment with the ruling in a separate email.
A series of mortgage-related rulings have been appealed in recent years. The U.S. Court of Appeals for the 2nd Circuit recently heard arguments on an appeal by UBS that the Federal Housing Finance Agency waited too long to file lawsuits charging the bank and other underwriters with misconduct in the sale of securities backed by residential mortgage loans sold to Fannie Mae and Freddie Mac over a roughly two-year period beginning in 2005.
In October, Goldman Sachs asked the U.S. Supreme Court to overturn a ruling by the 2nd Circuit that allows a pension fund for electrical workers to file a class-action lawsuit in connection with securities backed by residential mortgages the fund itself did not purchase.