S&P can’t get California suit dismissed

by Ryan Smith20 Nov 2013

Standard & Poor’s couldn’t get a judge to agree last week to throw out a lawsuit filed against it by California Attorney General Kamala Harris, who seeks to hold the company to account for $1bn in losses by state pension funds.

The funds lost money after buying mortgage-backed securities awarded the company’s highest rating, according to a Bloomberg report. S&P argued that its ratings are merely opinions, protected by the First Amendment, and that the lawsuit was an attempt at intimidation by the AG. But Judge Curtis Karnow denied the request Thursday.

It’s the second time Karnow has refused to quash the lawsuit. In August, he rejected S&P’s attempt to throw the suit out on the grounds that Harris had filed too late and lacked grounds to file because state funds weren’t involved in the pension funds’ purchase of the securities, according to Bloomberg.

Harris alleges that S&P used “guesses” and “magic numbers” when rating various mortgage-backed securities. California’s pension funds bought the securities because of S&P’s AAA rating – which indicated that the securities were low-risk investments -- but ultimately lost more than $1bn when the bonds tanked during the mortgage crisis, Bloomberg reported. Rather than objectively analyzing the quality of mortgage bonds, the ratings company was giving its highest ratings to shoddy securities in order to build up its business with the banks selling the investments, Harris maintained.

S&P isn’t only in trouble in California. Several other states and the federal government are suing the ratings company on similar grounds. S&P has categorically denied any wrongdoing, calling all of the lawsuits “meritless.”

“The claims are simply not true and we will vigorously defend S&P against them,” the company said in a statement.

The federal government is seeking $5bn in penalties against S&P. The ratings agency maintains that the federal suit was filed in retaliation for lowering the United States credit rating in 2011.

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