McGraw Hill Financial Inc., Moody’s Corp. and Fitch Group Inc. were sued by liquidators of two collapsed Bear Stearns hedge funds seeking more than $1 billion over allegedly faulty investment ratings.
The U.S. is seeking more than $5 billion in civil penalties from McGraw Hill’s Standard & Poor’s unit over credit ratings on mortgage-backed securities. An effort to have the Justice Department’s fraud lawsuit thrown out was tentatively rejected by a federal judge in California this week.
Geoffrey Varga and Mark Longbottom, the joint official liquidators of Bear Stearns High-Grade Structured Credit Strategies (Overseas) Ltd. and Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage (Overseas) Ltd., filed the suit yesterday in New York state Supreme Court in Manhattan.
The liquidators accuse the companies of “improperly and fraudulently” rating securities and “intentionally and knowingly” misrepresenting information about their independence, the accuracy of the ratings, the quality of their models and their surveillance of collateralized debt obligations and residential mortgage-backed securities.’’
“Defendants, by omitting information they knew to be material from their credit rating analyses, including the then-deteriorating quality of the mortgages underlying the CDOs and RMBS at issue, offered a product and/or service, i.e., a rating, that was materially different from what they represented it would be,” the liquidators said in their filing.
The allegations are without merit and Standard & Poor’s and Fitch will defend themselves vigorously, the companies said in separate statements. Michael Adler, a spokesman for Moody’s, didn’t respond to an e-mail seeking comment on the liquidators’ suit.
McGraw Hill last month won a bid to move lawsuits filed by 14 states and the District of Columbia to federal court in New York. The suits accuse McGraw Hill and Standard & Poor’s of inflating ratings on mortgage-backed securities.
The funds, part of Bear Stearns Asset Management, collapsed in 2007, a year before their parent company, which was eventually bought by JPMorgan Chase & Co.
The funds were run by portfolio manager Ralph Cioffi and chief operating officer Matthew Tannin, who were acquitted of conspiracy and securities and wire fraud in federal court in Brooklyn in November 2009 in the first criminal trial stemming from a federal probe of the collapse of the subprime mortgage-market.
Cioffi and Tannin later agreed to a $1.05 million settlement with the U.S. Securities and Exchange Commission, which had alleged that the two men misled investors about the funds’ deepening financial troubles and their own holdings in the investment pools.
The case is Varga v. McGraw-Hill Financial Inc., 652410/2013, New York state Supreme Court, New York County (Manhattan).