McGraw-Hill to Consolidate S&P Lawsuits in Federal Court

McGraw-Hill Cos. is asking for 16 lawsuits over its Standard & Poor’s unit’s securities ratings to be moved into federal court, where the company will claim S&P is protected by the U.S. Constitution’s guarantee of free speech.

McGraw-Hill, based in New York, filed so-called notices of removal in several courts to put the cases under federal jurisdiction and combine them for pretrial matters, such as the exchange of evidence and questioning of witnesses.

The lawsuits, filed by state attorneys general and lawyers for the District of Columbia, allege that S&P violated state consumer-protection and unfair-trade-practices statues.

In federal court, the cases will be “adjudicated in a manner that takes into account the significant federal regulatory and constitutional issues that are necessarily and directly implicated,” the company said in papers filed yesterday in U.S. District Court in Wilmington, Delaware.

The U.S. separately sued New York-based S&P and McGraw-Hill Feb. 4 in Los Angeles federal court for allegedly disregarding the credit risks of mortgage bonds during the housing boom to win business rating securities.

Consolidating the cases would make it easier for McGraw-Hill to try to get all of the cases dismissed at once before any trials begin, Larry Hamermesh, a professor of corporate and business law at Widener University, said in an interview. Without moving to federal court, the company would have to win separate dismissal motions in each state, he said.

‘Strategic Move’

“This is a strategic move on the part of S&P, and we will respond in a way that will best protect the interests of Delawareans,” state Attorney General Beau Biden said in an e-mailed statement.

The company is facing at least 17 state suits, in addition to the District of Columbia case and the action by the U.S. Justice Department.

The Justice Department claims S&P downplayed and disregarded the risk posed by mortgage-backed securities and collateralized debt obligations when it issued inflated ratings on the investments. S&P was trying to increase revenue and market share and was favoring the interests of investment banks that sold the securities at the expense of investors, the government said.

S&P rated more than $2.8 trillion worth of residential mortgage-backed securities and almost $1.2 trillion worth of collateralized debt obligations from September 2004 to October 2007, according to the complaint. Federally insured financial institutions suffered $5 billion in losses on CDOs rated by S&P, the Justice Department said in a statement.

State Cases

According to McGraw-Hill's court filing in Delaware, the 15 states covered by its effort to move cases to federal court are: Arizona, Arkansas, Colorado, Connecticut, Delaware, Idaho, Illinois, Iowa, Maine, Missouri, North Carolina, Pennsylvania, South Carolina, Tennessee and Washington. Those requests also cover the case filed by the District of Columbia.

A case brought by Mississippi is already in federal court. A case filed by California isn't being moved because it's related to a private lawuit seeking overlapping relief that is already being litigated in state court, according to the filing in Delaware.

The Delaware case is State of Delaware v. McGraw-Hill Cos., U.S. District Court, District of Delaware (Wilmington). The U.S. case is U.S. v. McGraw-Hill Cos., 13-cv-00779, U.S. District Court, Central District of California (Los Angeles).

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