A Choir Boy Battles Wall Street

Richard Cordray lives in a 130-year-old brick farmhouse near Grove City, Ohio, just four miles from the modest home where he polished his jump shot growing up. He played varsity basketball for the local high school and was valedictorian. In 1987, Cordray won $45,303 on the game show Jeopardy!, retiring as a rare five-time champion. Now, Cordray, 50, is his home state's attorney general. His ethics appear above reproach. When the Dayton Daily News endorsed him for attorney general in 2008 it called him a "choir boy"—a comparison that almost understates the perfection of his résumé. Choir boys sometimes sing off-key.

On Wall Street, Cordray is seen less as too-good-to-be-true than as the heir of pit bull prosecutors-turned-politicians such as Eliot Spitzer and Rudy Giuliani. In the past year, Cordray, a Democrat, has sued Merrill Lynch for allegedly misleading investors and former American International Group (AIG) executives for alleged accounting fraud—winning settlements of $475 million and $115 million, respectively. He's the lead plaintiff in a multistate suit against Bank of America (BAC) alleging that the firm withheld bad news from investors just before its 2009 acquisition of Merrill Lynch. More recently, Cordray has taken on bond-rating agencies Standard & Poor's (MHP), Moody's Investors Service (MCO), and Fitch Ratings, which he says deliberately gave triple-A ratings to junky debt to win fees and retain business. "Some Wall Street corporations seem to act with complete and total disregard for the work of regular Ohioans," says Cordray. "My central goal, and the goal of this office, is to protect those hard-working Ohioans."

Cordray, who was elected attorney general in 2008 following the resignation of fellow Democrat Marc Dann amid a sex scandal, says he's not planning to run for governor in 2014. Others predict he will. "I think it's quite likely," says John C. Green, professor of political science at the University of Akron. "Building a record while in office is good politics in any event—it can help him this year and in future elections." John Fortney, a local television news anchor who has covered Ohio politics for two decades and was a panelist at the 2008 attorney general debate, is certain Cordray will enter the race. "I think you will find him making a run for governor just because the party needs him."

As attorney general, Cordray has chosen his cases with the care of someone intent on burnishing a political résumé. "He files these suits more for politics than for good policy," says Mark R. Weaver, who from 1995 to 1999 served as deputy attorney general under Republican Betty Montgomery and now works as a political consultant. Cordray says his case selection is apolitical. Shortly after taking office, he says, he threw out a suit against lead-paint manufacturers—an easy political target if ever there were one—because the state's legal arguments were too flimsy.

In suing the rating agencies, Cordray is taking on his biggest challenge yet. The firms may be vilified by people angry about the credit crisis, but they're also tough legal competitors. Over the years the ratings firms have succeeded many times in persuading courts that bond ratings are nothing more than editorial opinions, and thus are subject to free speech protection under the First Amendment of the U.S. Constitution. In 1997, Orange County, Calif., lost a suit against Standard & Poor's on these grounds.

After the financial crisis, though, the First Amendment defense looks less solid. In September 2009, Judge Shira A. Scheindlin of the U.S. District Court in New York denied a motion from Moody's and S&P to dismiss a suit brought by Abu Dhabi Commercial Bank and King County, Wash., on First Amendment grounds. "The crux of the cases will be whether there was a known misrepresentation," says Spitzer, the former New York governor and, before that, attorney general, who is a Cordray admirer. "Being wrong is not a crime." Kevin M. LaCroix, an attorney and partner at OakBridge Insurance Services, says of the suit's chances: "I think it's an uphill but not insurmountable battle." Moody's and S&P say the suit is without merit. Fitch didn't return phone calls seeking comment.

Cordray, a corporate lawyer for two decades who has argued seven cases before the U.S. Supreme Court, is bringing in top-flight private litigators for the fight. Whereas Spitzer famously assigned the bulk of his office's legal work to in-house attorneys, Cordray is recruiting from big outside firms such as Entwistle & Cappucci, Lieff Cabraser Heimann & Bernstein, and Schottenstein Zox & Dunn. Critics say the practice wastes taxpayer money, since the outside attorneys will reap big contingency fees from any settlement. "Even if the cases are successful and Ohio recoups some money, a large portion is lost to paying well-connected plaintiffs' firms," says Weaver. In February members of the state's Controlling Board, a group charged with overseeing fiscal issues, demanded that Cordray's office justify the additional cost to the state. The board asked why the attorney general's office would pay attorneys from Hogan & Hartson $670 an hour in a case involving the University of Cincinnati's University Hospital when in-house lawyers command far less. Cordray says the cases are assigned on merit, and that the university is paying Hogan & Hartson's high-priced bill. Before pursuing the Bank of America suit, for example, he convened a group of lawyers in his Columbus office to debate whether to litigate and make a pitch for why their firms should win the state's business. "He peppered us all with very detailed questions," says Max W. Berger, whose firm, Bernstein Litowitz Berger & Grossman, has contracted with Cordray's office on the case. Bank of America declined to comment on the case.

While Cordray says he's eager to take on BofA and the ratings agencies, he doesn't want a protracted court fight. He isn't unique among attorneys general, who have historically fought corporate foes in public forums and settled before going to trial. Class-action attorneys say attorneys general revel in the publicity of big settlements—and hope to avoid alienating the public with costly court battles. "They believe in trial by press conference," says Boris Feldman, a partner with Wilson Sonsini Goodrich & Rosati, a securities-litigation specialist in Palo Alto, Calif. "It's very rare that they actually litigate a case." Perhaps that's because the few who have ventured into court haven't always fared well. In 2004, then Attorney General Spitzer sued Richard A. Grasso, the chairman of the New York Stock Exchange (NYX), for allegedly misleading investors about his pay package. While Spitzer won in New York State Supreme Court, the decision was largely overturned by the New York State Court of Appeals.

If Cordray beats the odds and wins a splashy settlement with the ratings agencies, it would certainly bolster his chances of winning the governor's race in 2014. That's if he decides to run, of course. For now, Cordray says he intends to focus on his job as Ohio's top prosecutor. "The key is to do a good job now." A good job for Ohioans might not win him many friends on Wall Street.

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