Bear Stearns Fund Liquidator Suit Assails Ratings Firms

McGraw Hill Financial Inc.’s Standard & Poor’s unit, Moody’s Corp. and Fitch Group Inc. were sued by the liquidators of two Bear Stearns hedge funds, who accused them of issuing ratings they knew were bogus.

Geoffrey Varga and Mark Longbottom, the liquidators of the two defunct funds, filed a summons and notice in New York State Supreme Court in Manhattan in July indicating their intention to sue the companies over their ratings. The liquidators filed a complaint today giving details of their claims.

In their lawsuit, which seeks damages in connection with more than $1 billion in losses, the liquidators include communications that they say show the companies knew their ratings were faulty.

In one text message cited in the filing, an S&P employee purportedly told a co-worker that investments could be “structured by cows” and still get rated. An internal document from a Moody’s worker said the firm sold its soul “to the devil for revenue,” according to the complaint.

“These quotes are not the punch line to a bad joke,” the liquidators said in the complaint. They are “evidence that, at the same time these ratings agencies were issuing their top, virtually risk-free ratings on numerous complex securities, each of these very same rating agencies (but not the investing public) knew the ratings were false.”

No Merit

The allegations are without merit and Standard & Poor’s will fight them, Ed Sweeney, a spokesman for the New York-based company, said in an e-mail.

Daniel Noonan, a spokesman for New York-based Fitch Group, also said the claims lacked merit and the company would defend itself. New York-based Moody’s didn’t immediately return a phone message left with its media relations office seeking comment.

The funds, the Bear Stearns High-Grade Structured Credit Strategies Fund and the Bear Stearns Enhanced Leverage Fund, part of Bear Stearns Asset Management, collapsed in 2007, a year before their parent company, which was eventually bought by JPMorgan Chase & Co.

The collapse of the two funds marked the beginning of the crisis in subprime home loans in mid-2007 and helped drive the firm out of business. The two hedge funds, holding about $1.6 billion, began liquidating in July 2007.

Settlement Agreements

Within months, Bear Stearns sought settlement agreements with investors based on how long they had been with the funds.

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, New York, in November 2009 in the first criminal trial stemming from a federal probe of the collapse of the subprime mortgage-market. A federal judge in September dismissed a lawsuit by Bank of America Corp. over the funds’ collapse.

The Justice Department accused S&P of fraud in a lawsuit filed in February, 18 months after the McGraw Hill unit downgraded U.S. sovereign debt, in the first federal case against a ratings firm for grades related to the credit crisis.

The case is Varga v. McGraw Hill Financial Inc., 652410/2013, New York state Supreme Court, New York County (Manhattan).

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