Ratings by Moody's, Fitch, S&P Ruled to Be Protected Speech

Ratings by Moody’s Investors Service Inc., Standard & Poor’s and Fitch Ratings Ltd. described as “wildly inaccurate” in a $1 billion lawsuit are protected speech, a California judge said in a tentative ruling.

Judge Richard Kramer in San Francisco state court said yesterday that the companies’ ratings of three structured investment vehicles that the California Public Employees’ Retirement System lost money on are a form of speech about an issue of public interest that is protected under a state law designed to fend off cases meant to chill public debate.

The law aims to protect “good guys” trying to exercise free speech from their adversaries who seek to quell the speech by filing meritless lawsuits, Kramer said.

“There is a public interest in the country’s economy and the types of investment opportunities that exist,” Kramer said at a hearing yesterday. “They are potentially good guys here.”

Calpers sued the three bond-rating companies in July 2009 for losses it said were caused by their “wildly inaccurate” risk assessments on three structured investment vehicles. The so-called SIVs, after receiving the companies’ highest ratings in 2006, collapsed in 2007 and 2008, according the Calpers complaint.

Anti-SLAPP

Moody’s and the two other ratings companies are seeking to have the case dismissed under California’s anti-SLAPP statute. The 1992 law was passed in California in response to lawsuits filed by real estate developers and other businesses against people opposing their projects. SLAPP stands for “strategic lawsuits against public participation.”

The ruling doesn’t end the case, Kramer said. Calpers, the largest U.S. pension fund, can attempt to show that it’s likely to win on the merits of its lawsuit. In May he rejected the ratings companies’ request to dismiss the case, saying that the issuance of SIV ratings isn’t a matter of public concern but an “economic activity designed for the limited purpose of making money” that isn’t protected by the First Amendment.

Kramer said that his earlier rulings “have absolutely nothing to do with this hearing.” The earlier ruling on dismissal didn’t take into account whether the ratings were protected speech under the terms of the anti-SLAPP law.

The companies all gave their highest ratings to Cheyne Finance LLC, Stanfield Victoria Funding LLC and Sigma Finance Inc., prompting Calpers to invest $1.3 billion in them in 2006, the fund said in its complaint.

Specific Buyers

The SIVs, unregistered securities, could only be sold to specific classes of buyers. The assets underlying the SIVs were known only to the SIVs and the ratings companies, which published the ratings in offering materials, on their websites for a brief period and on private financial reporting services, the Calpers complaint said. The underlying assets of the three SIVs consisted primarily of risky subprime mortgages, the complaint said.

Joseph Tabacco, an attorney for Calpers, told Kramer that the ratings companies were working “hand and glove” with clients who structured the SIVs and couldn’t have sold them to investors without ratings.

Kramer said it doesn’t matter that there was limited dissemination of the ratings to select investors who could buy them. He said that making predictions about the economic performance of investment vehicles is protected speech and it’s up to Calpers to show that its claims have substance.

‘Doesn’t Shelter Behavior’

The anti-SLAPP law “doesn’t shelter behavior,” said Kramer. Calpers can now seek information from the ratings companies to back up its claims, he said.

Tabacco said Calpers would examine its options and expects to prevail.

“We are happy that once the judge had the opportunity to look beyond the plaintiff’s bare allegations, he reaffirmed that ratings are a form of protected speech,” said Michael Adler, a spokesman for Moody’s in New York.

“We are very pleased with this decision, which reaffirms the long-held precedent that credit opinions be regarded as protected speech,” Daniel Noonan, a Fitch spokesman, said in an e-mail.

Edward Sweeney, an S&P spokesman, didn’t immediately return a call.

The case is Calpers v. Moody’s, 09-490241, Superior Court of California, County of San Francisco.

To contact the reporter on this story: Karen Gullo in San Francisco at kgullo@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

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