Standard & Poor’s told a judge that California’s lawsuit over state pension fund losses from mortgage-backed securities should be thrown out because it doesn’t meet requirements for a false-claims case.
McGraw Hill Financial Inc. (MHFI) and its S&P unit also said in a state court filing in San Francisco that California Attorney General Kamala Harris filed her lawsuit too late. The lawsuit is one of more than a dozen over S&P giving the highest credit ratings to mortgage-backed securities whose value evaporated after the U.S. housing bubble burst.
“While there are a number of federal and state securities laws that are specifically designed to address possible misstatements in the context of securities transactions, false claim statutes, like the California False Claims Act, are not among them,” the companies said in their May 31 filing.
The California Public Employees’ Retirement System and the California State Teachers Retirement System lost about $1 billion after the housing market collapsed in 2007 and the securities backed by residential mortgages were downgraded to junk status, Harris, a Democrat, said after her office filed the complaint on Feb. 5.
The state complaint was filed one day after the U.S. Justice Department sued the company, alleging it lied to investors about its credit ratings for residential mortgage-backed securities and collateralized-debt obligations being free of conflicts of interest. On April 22, S&P requested that the U.S. case in federal court in Santa Ana, California, be dismissed.
The California lawsuit echoed the Justice Department’s claims that S&P investment-grade ratings were driven by the desire for business rather than by an objective evaluation of the credit risks of the securities.
Nick Pacilio, a spokesman for Harris, had no immediate comment yesterday on the filing.
Lawsuits against S&P alleging it inflated securities ratings were also filed in February by Arizona, Arkansas, Colorado, Delaware, Idaho, Iowa, Maine, Missouri, North Carolina, Pennsylvania, South Carolina, Tennessee, Washington and the District of Columbia. Mississippi had sued earlier.
McGraw Hill and S&P removed all of the cases except California’s from the state courts where they were filed to their geographically overlapping federal courts as a prelude to a bid to get them grouped for pretrial proceedings in New York.
At a May 30 hearing in Louisville, Kentucky, S&P lawyer Floyd Abrams told the Judicial Panel on Multidistrict Litigation that the state lawsuits have almost identical claims and are based on the same underlying facts, making them suitable for consolidation before one judge. The panel hasn’t issued a decision on S&P’s request yet.
Justice Department officials said in February they may seek more than $5 billion in penalties from S&P based on the losses suffered by federally insured financial institutions that relied on S&P’s investment-grade ratings to buy securities that were subsequently downgraded or were exposed to defaults.
S&P rated more than $2.8 trillion of residential mortgage-backed securities and about $1.2 trillion of collateralized-debt obligations from September 2004 through October 2007, according to the Justice Department’s complaint.
S&P downplayed the risks on portions of the securities to gain more business from the investment banks that issued them, the U.S. said in its complaint filed in Los Angeles federal court Feb. 4.
The collapse in value of securities that packaged home loans from the riskiest borrowers led to a credit seizure starting in 2007 that sent the world’s largest economy into its longest recession since 1933, as defaults soared and home values plummeted.
S&P, based in New York, said in its April 22 request to dismiss the Justice Department’s lawsuit that its public statements about its ratings being free of conflicts of interest couldn’t form the basis of fraud allegations.
The case is the People v. McGraw-Hill Cos., CGC-13-528491, San Francisco County Superior Court. The U.S. case is U.S. v. McGraw-Hill, 13-cv-00779, U.S. District Court, Central District of California (Santa Ana).
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