Ratings Agencies Seek a Dismissal

By Joel Rosenblatt and David Watts Barton, Bloomberg Business, July 9, 2010

Moody’s Investors Service Inc., Standard & Poor’s and Fitch Ratings asked a judge today to dismiss a lawsuit filed by two California investors who claim the companies gave inflated ratings to inferior bonds.
Ronald Grassi, a retired California attorney, and his wife, a retired teacher, sued the New York-based companies over claims they had a conflict of interest in rating Lehman Brothers Holdings Inc. mortgage-backed bonds. The companies named the bonds “investment grade” to achieve more sales of their rating services and didn’t downgrade the bonds until Lehman filed for bankruptcy in 2008, Grassi said.
U.S. Magistrate Judge Dale A. Drozd in Sacramento threw out the case in a March ruling, saying Grassi’s negligence and fraud allegations weren’t specific enough. Grassi filed a more detailed complaint in April. A similar case in state court in San Francisco survived the companies’ request for dismissal in May, Grassi said in a filing.
“I’m claiming the ratings agencies who spent 60 to 70 years becoming the only expert in town convinced everybody that they knew what was going on,” Grassi said in a phone interview. “When they say ‘investment grade,’ they’re saying this is a pretty safe bond; you’ll probably get your money back and probably get your interest payments.”
‘Duty of Care’
In court documents, the companies claim Grassi failed to make a case that they owed him a “duty of care,” which is required to support his negligence claim. Grassi’s second complaint still lacks “substantive allegations about the ratings of the Lehman bonds” and doesn’t include allegations that the companies “made any false statements in connection with the specific bonds at issue in this case,” they said in court filings.
As with similar suits filed in other states, the companies also argue that credit ratings are statements of opinion protected by the Constitution’s First Amendment.
“Ratings are, by their nature, opinions about the future,” Floyd Abrams, a lawyer for the companies said at today’s hearing. The ratings companies face no liability, he said, “because there’s no such thing as a false opinion.”
“We are hopeful the case will be dismissed on the grounds that there was no legal duty, and that the rating is an opinion about the future, which cannot give rise to a claim such as this,” Abrams said in an interview after the hearing.
Defrauding Investors
In January, Standard & Poor’s and Moody’s won dismissal of a lawsuit seeking to hold them responsible for defrauding investors who bought about $100 billion of mortgage-backed securities. Connecticut and Ohio also sued the ratings companies.
The Grassis said in court filings that they spent $40,000 on the Lehman bonds that carried A ratings and turned out to be worthless.
Fitch is a unit of Paris-based Fimalac SA and Moody’s is a unit of Moody’s Corp. Standard & Poor’s is a unit of McGraw-Hill Cos.
The case is Grassi v. Moody’s, 09-00543, U.S. District Court, Eastern District of California (Sacramento).