Connecticut Sues Moody's, S&P Over 'Tainted Ratings'
NEW YORK (Dow Jones)--Connecticut Attorney General Richard Blumenthal sued rating agencies Moody's Investors Service and Standard & Poor's on Wednesday, alleging they knowingly assigned "tainted ratings" to risky investments backed by subprime loans.
In separate lawsuits filed in state court in Connecticut, Blumenthal alleged Moody's and S&P sacrificed their independence and allowed a desire for increased revenue and market share in structured-finance products to improperly influence their rating methodologies.
As a result, many securities backed by subprime-loan portfolios that contained a great deal of credit risk undeservedly received Moody's and S&P's highest ratings, Blumenthal said.
"Moody's and S&P violated public trust--resulting in many investors purchasing securities that contained far more risk than anticipated and that have ultimately proven to be nearly worthless," Blumenthal said in a statement.
Moody's Corp. (MCO), the parent of Moody's Investors Service, and McGraw-Hill Cos. (MHP), the parent of S&P; also were named as defendants in the lawsuits filed in Superior Court in Hartford.
"Our investigation is ongoing; however, our most compelling and overwhelming evidence of violations at this point is against Moody's and S&P," Blumenthal said.
The lawsuits allege deceptive, unfair and illegal business practices under the state's Unfair Trade Practices Act.
"We believe the claim has no legal or factual merit and we intend to vigorously defend ourselves against it," said Steve Weiss, a McGraw-Hill spokesman.
In a statement, Michael Adler, a Moody's spokesman, said, "The state attorneygeneral's suit is without merit and we are confident we will prevail once we have an opportunity to present the facts of the case."
A number of lawsuits have been filed against the major rating agencies in recent months following a credit crisis fueled by the meltdown of many subprime mortgages in the U.S. and securities backed by those loans.
In November, Ohio Attorney General Richard Cordray announced that his office had filed a lawsuit against S&P, Moody's and Fitch Ratings in federal court on behalf of five Ohio public-employee retirement and pension funds accusing them of "wreaking havoc on U.S. financial markets by providing unjustified and inflated ratings of mortgage-backed securities in exchange for lucrative fees from securities issuers."
The Ohio funds lost more than $457 million as a result, Cordray said at the time.
The rating agencies have denied wrongdoing.
In 2008, Blumenthal's office separately sued Moody's Corp., McGraw-Hill andFimalac SA's (FIM.FR) Fitch in state court in Connecticut, alleging they "systematically and intentionally" gave lower ratings to states, municipalities and other public entities than corporate and other forms of debt with similar or worse default rates. Those suits are pending.
-By Chad Bray, Dow Jones Newswires; 212-227-2017; chad.bray@dowjones.com
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