July 30 (Bloomberg) -- Connecticut Attorney General Richard Blumenthal sued Moody's Corp., Fitch Inc. and Standard & Poor's parent The McGraw Hill Cos. for allegedly giving municipal bonds lower ratings than comparable corporate or structured debt.

``We are holding the credit-rating agencies accountable for a secret Wall Street tax on Main Street,'' Blumenthal said in a statement. The complaints, filed today in Connecticut Superior Court in Hartford, seek redress for what Blumenthal called the companies' ``unfair, deceptive and illegal'' business practices.

Blumenthal, the state's top law enforcement officer, has been conducting an antitrust probe of the three credit-rating companies. Last month, he said firms that rate U.S. municipal bonds ``knowingly and systematically'' gave the securities lower grades, raising costs for state and local governments.

Moody's, under pressure from regulators and state finance officials, said last month it would change the way it rates municipal bonds and rank them on the same scale it uses for corporate and sovereign debt. Blumenthal said the dual standard benefited bond insurers, investors and the agencies themselves.

``This rating charade created a Wall Street shell game constructed by the ratings agencies for the benefit of the bond insurers,'' he said, adding that bond insurers profited from unnecessary premiums and interest paid by taxpayers.

`Meritless' Suit

Moody's Chief Executive Officer Raymond McDaniel called the lawsuit ``meritless.''

``The suit implies that the measuring system is wrong,'' McDaniel said today during a conference call with analysts. ``That's like saying it's wrong to measure distance in centimeters and right to measure it in inches.''

Blumenthal's allegations are ``an unfortunate development'' and without merit, Fitch Managing Director David Weinfurter said in an e-mailed statement, adding the firm would fight the suit.

``Fitch rates Connecticut and all states based on our forward-looking opinion as to their financial capacity to pay their debts as they come due -- not based solely on historical rates of default,'' Weinfurter said in the statement.

He added that Fitch has performed ``a comprehensive review'' of its municipal finance ratings and will disclose the results tomorrow.

Standard & Poor's spokesman Chris Atkins declined to immediately comment.

Higher Standard

State officials and regulators have criticized New York- based Moody's, New York-based Standard and Poor's and Fitch, a unit of Paris-based Fimalac, for using a scale that raised borrowing costs by holding municipal bonds, whose 10-year default rate was 0.1 percent between 1970 and 2006, to a higher standard than corporate and sovereign debt.

Many issuers bought bond insurance to improve their rating, a strategy that backfired this year when some guarantors lost their AAA ratings amid subprime mortgage-related losses.

The Connecticut probe has included whether the firms rank debt against issuers' wishes, then demand payment, or threaten to downgrade debt unless they're awarded business to rate all of an issuer's securities, Blumenthal has said.

He has also been scrutinizing links between Moody's and its largest shareholder, Warren Buffett's Berkshire Hathaway Inc.

To contact the reporter on this story: Karen Freifeld in New York at kfreifeld@bloomberg.net.

Last Updated: July 30, 2008 12:59 EDT