I suspect we are FINALLY seeing the beginning of the endgame for the rating agencies.

“A U.S. judge refused to dismiss a lawsuit against Moody’s Investors Service Inc. and Standard & Poor’s, rejecting arguments that investors can’t sue over deceptive ratings of private-placement notes because those opinions are protected by free-speech rights.

U.S. District Judge Shira Scheindlin in New York rejected the ratings firms’ arguments yesterday, leaving them and Morgan Stanley to defend against fraud charges in a class-action lawsuit that alleges they hid the risks of an investment linked to subprime mortgages. The ruling may affect Fitch Group Inc. and other credit raters that have made similar arguments after investors lost money following their advice on subprime and other asset-backed investments.

Scheindlin said in her ruling that the First Amendment of the U.S. Constitution doesn’t apply in the case because the rating firms’ comments were distributed to a select group of investors and not to the general public.”

Whether there will be a misguided reprieve from the defenders of the status quo is beyond my wildest guess.


Ratings Firms Lose Free-Speech Bid to Dismiss Lawsuit
Joel Rosenblatt and David Glovin
Bloomberg, Sept. 3 2009


Category: Bailouts

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

22 Responses to “Rating Agencies Must Defend AAA Junk in Court”

  1. Marcus Aurelius says:

    If found guilty, I hope these “people” — Moody’s Investors Service Inc., Standard & Poor’s and Fitch Group Inc. — do hard time for their criminality.

    Oh . . . wait . . . they’re not considered “people” when it comes to responsibility and punishment — but they are when they assert their rights and claim the privileges as such.

    We need to remove the corporate shield from the people in charge of these continuing criminal enterprises, or we need to augment the civil actions against them with a very liberal application of the RICO statutes.

    Money recovered by civil action is simply not enough of a penalty. We need real, physical, tangible bodies in real cold hard prison cells to teach anyone else who would commit such fraud a lesson.

  2. SINGER says:

    Interesting…Lets not get our hopes up because this is a motion to dismiss and at this point the court takes the plaintiffs assertions as true. The first amendment argument was a nice try but obviously it got shot down. Probable out come – the litigation develops further while defendants’ counsel racks up some sizable billing time. Then eventually we will have a rather hefty settlement that will line the class action firms pockets…

    Not sure if there will ever be justice…

  3. snapshot says:


    Barry – Also Rueters: “Morgan Stanley, Moody’s, S&P Must Defend Fraud Claims”

  4. leftback says:

    You can just imagine their defence: “Your honor, everyone on the Street knows that our ratings weren’t intended to be taken seriously, and are not to be used as investment guidelines.”

  5. Moss says:

    The irony of the defense argument is telling. Hopefully the lawyered up morons will get real justice placed upon them by the very system they tried to game. Show no mercy take no prisoners. We simply can’t let them get away with it.

  6. Mannwich says:

    How desperate and pathetic can an entity be in using the “right to lie” under the Constitution as its main defense?

  7. torrie-amos says:

    kudos to the judge, the facts support though it means nothing, they will find another arguement, another court, and the beat goes on

  8. TDL says:

    I don’t think who these firms distributed to is relevant. These firms have (or more appropriately the people at these firms) have first amendment rights. The issue here is not whether or not the 1st amendment shields people (and firms) from the consequences of their lies; Anglo-American tradition certainly does not use free speech as a shield against fraud. The ratings agencies can say whatever they want, but if they mislead (intentionally or otherwise) they have committed an act of fraud. Seems pretty simple to me.


  9. DeDude says:

    It will be the end of them if they are held liable for their payola. It would be so much better if they were replaced by a system of insurance where the company that places a certain low risk on a paper is forced to offer insurance on that paper for a corresponding low rate. That way they have a strong self interest and incentive for getting it right.

  10. Groty says:

    The clowns who breeched their fiduciary duty by buying securitized smelly turds only because another set of clowns gave the smelly turds an investment grade rating is the bigger outrage, IMO. Institutional investors make obscene amounts of compensation in part because the people upon whose behalf they are investing are paying them to analyze credit risk. That function of their job, probably the most important, was outsourced to the rating agencies. The rating agencies wrapped smelly turds in pretty paper and the investors who bought the smelly turds had no clue what they were buying.

    So of course, because the smelly turd buyers failed to do their job, they want to pass the blame on to the folks who wrapped the smelly turds in the pretty paper.

  11. Transor Z says:

    I think I commented months and months ago something I’ll repeat: I truly believe we’re going to see a number of landmark opinions come out of this mess. Unfortunately, the judiciary doesn’t move along at news cycle pace.

    In a lot of cases the language of regulations and laws are too broad to give clear guidance as to compliance requirements. It often takes court decisions to hash out whether an accounting system is fraudulent or not, whether investors were properly and timely notified in a certain set of circumstances, whether ratings agencies committed fraud.

    Billions of dollars are at stake in all of this litigation and it will be litigated to the hilt by both sides. But it will take time to sort out, as it should.

  12. constantnormal says:

    @Marcus Aurelius 9:46 am

    “Money recovered by civil action is simply not enough of a penalty”

    It depends on how much money is recovered. Note that this case is only over a single SIV. If there is a substantial or significant recovery of losses from this, the floodgates will open, and every pension fund and insurance company will be launching well-funded legal assaults on the ratings agencies.

    This strikes me as being very similar to the lawsuits against the tobacco companies, with specific individual lawsuits being repeatedly defeated until enough connected that they built a body of legal precedence. Then the class-action suits rose up, and the tobacco industry was fighting for its profits. We could see something similar evolve here, although it may take decades to amount to anything.

    But even so, remember that the tobacco industry still pulls down humongous profits, and I don’t believe that any tobacco corporate executives ever did jail time, despite knowingly selling addictive products that literally kill people, so it is unlikely that mere financial fraud, no matter on what scale, will lead to jail time (Madoff being the exception to that rule).

    I still expect this lawsuit to fail to win — although I believe that the discovery process could blow the whole thing wide open, especially if it reveals widespread collusion between the banksters (where the REAL riches are stashed) and the ratings agencies. I’ll bet email servers at the ratings agencies and banksters are having a record number of disk drive failures about now.

  13. Onlooker from Troy says:

    “The issue here is not whether or not the 1st amendment shields people (and firms) from the consequences of their lies; Anglo-American tradition certainly does not use free speech as a shield against fraud. ”

    That whole line of thinking of the judge didn’t strike me as the right angle to take either. Seems weak to me, but I’m not a lawyer. Fraud seems like a better, stronger rationale for putting this down.

    “Scheindlin said in her ruling that the First Amendment of the U.S. Constitution doesn’t apply in the case because the rating firms’ comments were distributed to a select group of investors and not to the general public.”

    Does that sound right to you as a lawyer? The whole 1st amendment thing just doesn’t sound right, but this doesn’t seem like the reasoning to dismiss the argument.

  14. on this lunch-hour intermission from R&D pursuits..

    with this Individual: U.S. District Judge Shira Scheindlin

    maybe, in addition to the List of those that need to understand that they Can’t be understood, We should start the, contra, List of those that We can understand..

  15. DeDude says:

    Groty; so if your doctor gives you the wrong treatment, or a medicine that have dangerous interactions with another drug he has told you to take – then its your own damn fault for not knowing the medical literature and second guess him ???

  16. DeDude says:

    Next step should be the lawsuits from shareholders and mutual fund owners against those who failed to control compensation. That’s another huge con-game that needs to be shut down.

  17. and, upon reflection, this: “”Find out just what the people will submit to, and you have found out the exact amount of injustice and wrong which will be imposed upon them; and these will continue until they are resisted with either words or blows, or with both. The limits of tyrants are prescribed by the endurance of those whom they oppress.”– Frederick Douglas (1857)

    seems appropriate to the Thread..

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  19. Pat G. says:

    “Whether there will be a misguided reprieve from the defenders of the status quo is beyond my wildest guess.”

    Yes, but the notoriety from the lawsuit is bound to impact their credibility especially since, they are attempting to use the freedom of speech argument as a defense. And in the future, when investors see their names tagged as the rating agency for any given financial instrument, it will make them pause.

  20. Here is a list of pending class action lawsuits where a rating agency is named as a defendant.


  21. Pierre Paulden says:

    Moody’s, S&P Court Ruling Is ‘Landmark’ Decision, Einhorn Says
    Pierre Paulden

    Sept. 4 (Bloomberg) — David Einhorn, the hedge-fund
    manager who is betting against Moody’s Corp., called a U.S.
    judge’s refusal to dismiss a lawsuit against the ratings company
    a “landmark decision.”

    On Sept. 2, U.S. District Judge Shira Scheindlin in New
    York rejected arguments by Moody’s and McGraw-Hill Cos., owner
    of Standard & Poor’s, that investors can’t sue over deceptive
    ratings of private-placement notes because those opinions are
    protected by free-speech rights.

    Einhorn, who runs New York-based Greenlight Capital Inc.
    and bet against Lehman Brothers Holdings Inc. four months before
    its collapse, said Moody’s doesn’t have the deep pockets to meet
    all the potential claims against the company from losses
    investors incurred. The judge’s decision forces S&P, Moody’s and
    Morgan Stanley, which was also sued, to respond to fraud charges
    in a class-action by investors claiming the raters hid the risks
    of securities linked to subprime mortgages.

    “It reminds me of when the courts finally ruled a tobacco
    victim could sue a cigarette company,” Einhorn, 40, said today
    in a telephone interview. “The damage in this case is large
    relative to the ability to pay.”

    Moody’s and S&P, both based in New York, have been
    criticized by investors and lawmakers including Senate Banking
    Committee Chairman Christopher Dodd, who has said the companies
    wrongly assigned top credit rankings to subprime-mortgage bonds
    just before that market collapsed in 2007. The companies have
    fought lawsuits by arguing that the letter grades they assign to
    bonds to predict the risk of default are opinions protected by
    the First Amendment of the Constitution.

    Claims Dismissed

    “The court dismissed 10 of the 11 claims on grounds
    completely unrelated to the first amendment,” Anthony Mirenda,
    spokesman for Moody’s in New York said today in a telephone
    interview. “We remain confident we will prevail in the sole
    remaining claim in this case.” Mirenda declined to discuss
    Einhorn’s comments.

    Edward Sweeney, a spokesman for S&P in New York, said the
    company is pleased that Scheindlin dismissed all but one of 11
    claims in the suit.

    “We are confident that we will prevail on the remaining
    claim,” Sweeney said in a statement.

    Jennifer Sala, a Morgan Stanley spokeswoman, declined to

    Investors should buy shares of Moody’s and McGraw-Hill
    because “the decision has little implication for the eventual
    outcome of the case, or the ability of the rating agencies to
    rely on freedom of speech defense in ongoing litigation,”
    Peter Appert, an analyst at Piper Jaffray & Co. in San
    Francisco, wrote in a report yesterday.

    Short Position

    Einhorn said in the interview that the court ruling marks
    “a landmark decision in evaluating the responsibility of the
    credit-rating companies.”

    He said in a speech May 27 at the Ira W. Sohn Investment
    Research Conference in New York that he had a short position on
    Moody’s. Investors who sell short borrow shares with the
    expectation that they can be repurchased at a lower price to pay
    back the loan.

    Moody’s has declined 14 percent since the speech as of
    yesterday. Shares rose 17 cents, or 0.7 percent, to $24.43 as of
    1:08 p.m. in New York Stock Exchange composite trading.

    Warren Buffett’s Berkshire Hathaway Inc., the largest
    stockholder in Moody’s, sold 794,388 shares on Sept. 1 and Sept.
    2, according to a regulatory filing yesterday. Buffett’s firm,
    which cut its stake in Moody’s by 17 percent in July, still
    holds 39.2 million shares. The stake sold was valued at about
    $20.7 million, based on the closing price Sept. 2.

    Greenlight, which Einhorn started in 1996, manages about $5
    billion in assets. The firm’s Greenlight Capital LP fund gained
    16.3 percent in the second quarter, bringing its return this
    year to 21.5 percent. The fund lost 23 percent last year.

    The lawsuit was filed by Abu Dhabi Commercial Bank, based
    in the United Arab Emirates, and Washington’s King County, which
    includes Seattle. The plaintiffs, seeking class-action status,
    filed the complaint on behalf of themselves and other investors.

    For Related News and Information:

    Top arts and lifestyle stories: MUSE

    For all hedge fund news: NI HEDGE

    Moody’s top executives: MCO US MGMT

    Pierre Paulden

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