Lawyers for Ambac Financial Group, Moody’s Corp. and other bond insurance and credit ratings companies told a California judge that cities lack evidence to pursue an antitrust and negligence lawsuit against them.
The companies are fighting claims filed in 2008 alleging they conspired to force local governments in California to purchase insurance they didn’t need. Lawyers for the municipalities say the ratings companies and bond insurers schemed to maintain high credit ratings for the insurers and perpetuate a dual credit-rating system that punished cities with lower ratings than corporate entities.
Floyd Abrams, a lawyer representing McGraw-Hill Cos.’s Standard & Poors unit, said the cities don’t have sufficient evidence to overcome the defendants’ claims that the lawsuit is an attempt intimidate or censor them.
“We don’t think they have come close,” Abrams said in the morning session of a day-long hearing today in state court in San Francisco.
Abrams also is representing S&P in a U.S. Justice Department lawsuit filed Feb. 4 alleging the company inflated rankings for mortgaged-backed securities and downplayed their risks to maximize profits.
Judge Richard Kramer in San Francisco last year refused to toss claims in the lawsuit, originally filed by San Francisco, Los Angeles and several other California municipalities that allege a conspiracy among the ratings companies and bond insurers. The cities said the conspiracy cost them millions of dollars in fees to refinance bonds after the collapse of the subprime mortgage market.
Cities bought insurance to enhance the credit ratings of their bonds, while the ratings companies were giving their highest ratings to the risky subprime mortgage-backed securities the bond insurers were backing, according to the complaint. When the mortgage crisis occurred in 2008, the bonds became unmarketable and cities racked up millions in fees to support the bonds, said Nanci Nishimura, an attorney for the municipalities.
The defendants “were too rich to care,” she told Kramer.
Kramer questioned whether the plaintiffs had enough evidence to show that the bond insurers and ratings agencies had an agreement. It’s not enough to show that the companies all did the same thing with their ratings or they had a profit motive to give the high ratings, he said.
“You need to show sufficient evidence that they agreed to do something together, not that they have a motive to do it,” Kramer said.
He didn’t say when he would rule.
The case is Ambac Bond Insurance Cases, CJC-08-004555, California Superior Court (San Francisco).