S&P Ratings Case Filed by Illinois Sent Back to State Court

The McGraw-Hill Cos. and Standard & Poor’s (SPY) must face a lawsuit filed by Illinois Attorney General Lisa Madigan in state court, a federal judge ruled.

Madigan sued the companies in January 2012, claiming they had inflated mortgage-backed securities ratings to curry favor with their clients, violating the state’s consumer fraud and deceptive trade practice laws.

The companies sought in March to move the case to federal court in Chicago, while seeking a separate order to combine the case and 16 similar lawsuits by other states and the District of Columbia before a U.S. judge in New York.

“Defendants have failed to show that federal issues are necessarily raised,” by Madigan’s complaint, U.S. District Judge Matthew Kennelly in Chicago ruled in a decision released today, returning the case to the state court three blocks away.

Kennelly rejected S&P’s arguments that determining its liability under state law would require application of federal U.S. Securities and Exchange Commission regulations and that an Illinois judge would be forced to look to federal law “to determine whether the conduct at issue falls within the state statutes’ purview.”

Edward Sweeney, a spokesman for New York-based S&P, a McGraw-Hill unit, said in a statement that the ruling “does not speak to the merits of the case.”

Complex Issue

“While we respectfully disagree with the judge’s decision on the state’s motion, we are pleased that eight other courts have agreed to defer ruling on this novel and complex issue until the Multidistrict Litigation Panel has determined whether to consolidate these cases,” Sweeney said.

The U.S. Justice Department sued the companies in federal court in Los Angeles in February. About a dozen lawsuits filed by states including Arizona, Delaware, Missouri, North Carolina and Washington, were filed that month.

The federal Judicial Panel on Multidistrict Litigation is scheduled on May 30 in Louisville, Kentucky, to consider consolidating the cases.

“We’re very pleased with this decision in that it establishes that there is no federal jurisdiction over our state law claims,” Natalie Bauer, a spokeswoman for Madigan, said in an e-mailed statement. “Attorney General Madigan’s case belongs in the forum where she brought it on behalf of the people of Illinois. That’s what this decision allows.”

Too Late

A U.S. judge in Bridgeport, Connecticut, last month ordered that state’s lawsuit returned to the state court where it was filed in 2010, ruling its removal was untimely.

Kennelly also ruled S&P’s removal of Madigan’s case was made too late.

A U.S. judge in Seattle yesterday ordered progress on the Washington state lawsuit halted until 20 days after the multidistrict panel decides whether to aggregate the suits.

The case is People of the State of Illinois v. McGraw-Hill Cos., 13-cv-01725, U.S. District Court, Northern District of Illinois (Chicago).

To contact the reporter on this story: Andrew Harris in the Chicago federal courthouse at aharris16@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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