S&P Says Investors Can’t Sue Over High Ratings on Lehman Bonds

By David Watts Barton and Karen Gullo, Bloomberg Aug. 1, 2009

Standard & Poor’s, Moody’s Investors Service and Fitch Ratings
sought dismissal of a lawsuit by two
California investors, claiming they weren’t responsible for the
plaintiffs’ investment decisions.
The investors spent $40,000 on highly rated Lehman Brothers
Holdings Inc. bonds that turned out to be worthless. The ratings
services issue their opinions at the request of bond issuers and
to provide information to the public, said Floyd Abrams, an
attorney speaking for the ratings services, at a hearing
yesterday in federal court in Sacramento, California.
“Ratings go out to the world,” Abrams told U.S.
Magistrate Judge Dale A. Drozd. “A rating is issued, and
investors take what they need.”
S&P, Fitch and Moody’s face investor lawsuits and criticism
by lawmakers for grading mortgage bonds too high and maintaining
the ratings months after home-loan defaults surged in 2007. The
California Public Employees’ Retirement System, or Calpers, the
largest U.S. public pension fund, sued July 9 in a case in state
court in San Francisco over $1 billion in losses it blamed on
“wildly inaccurate” risk assessments.
Ronald Grassi, a retired California attorney, and Sally
Grassi, a retired teacher, sued the New York-based companies in
federal court in January for negligence, claiming they gave high
ratings to the Lehman bonds to curry favor with the investment
bank, which filed the biggest bankruptcy in U.S. history in
The Grassis said in court filings that they had sought safe
investments and bought the bonds because they held A ratings
from the companies.
Ronald Grassi, speaking in court yesterday, said investors
are a “limited group” to whom the ratings services owe a legal
“This is issuing false opinions for profit,” Grassi said.
Credit ratings are statements of opinion protected by the
Constitution’s First Amendment, the companies said in court
filings. They noted the dismissal of claims brought by Enron
Corp. investors who alleged that the companies published false
and misleading credit information about the now-defunct energy
The ratings companies said they can’t be sued for negligence
because they had no direct dealings with investors and made no
attempt to induce them to purchase the securities. The Grassis
haven’t shown that the companies knew their assessments were
faulty or acted with malice, lawyers said in court papers.
“Generalized accusations of wrongdoing, no matter how
harsh, cannot support a claim in this case,” lawyers for S&P
argued in court papers. “Plaintiffs must allege who at S&P made
negligent and/or fraudulent misstatements.”
Drozd told Grassi that “the only thing that really
matters” is whether he could show that the ratings services had
a legal obligation to investors.
“Your brief is interesting and well-done but light in
legal authority,” Drozd told Grassi.
At the end of the hearing, Drozd said he will make a
recommendation to a another judge who will issue a ruling on the
request by the ratings services to dismiss the case.
“I’m going to take the motion under consideration, but
it’s not going to be quick,” Drozd told the lawyers.
Calpers, in its state court complaint, said S&P, Moody’s
and Fitch used methods to analyze medium-term notes and
commercial paper that were “seriously flawed in conception and
incompetently applied.”
Fitch is a unit of Paris-based Fimalac SA, S&P is a unit of
McGraw-Hill Cos., and Moody’s is a unit of Moody’s Corp.
The case is Grassi v. Moody’s, 09-00543, U.S. District
Court, Eastern District of California (Sacramento).