S&P Seeks Dismissal of California Claims in Ratings Case

McGraw Hill Financial Inc.’s Standard & Poor’s unit asked a judge to throw out claims it violated false-advertising and business practices laws in a California lawsuit seeking at least $3 billion for the firm's alleged inflation of mortgage-backed securities ratings.

California Attorney General Kamala Harris can’t sue the company under laws covering such conduct because the statutes don’t apply to securities transactions, Melvin Goldman, S&P’s lawyer, said yesterday in a state court in San Francisco. Other claims in the state suit were filed too late, he said. It's the third attempt by S&P to throw out some part of the case.

The California suit is one of more than a dozen brought against S&P by the U.S. and a group of states over ratings on mortgage-backed securities during the housing boom. The U.S. Justice Department last year accused S&P of lying about its ratings being free of conflicts of interest and may seek as much as $5 billion in civil penalties.

The government claims are tied to losses suffered by U.S. insured financial institutions that relied on the company’s investment-grade ratings for mortgage-backed securities and collateralized-debt obligations, or CDOs.

Harris alleged in her complaint that S&P used “guesses” and “magic numbers” to inflate ratings of mortgage-backed securities purchased by the California Public Employees’ Retirement System and the state’s teacher pension fund.

Nick Pacilio, Harris’s spokesman, declined to immediately comment on the new state court filing.

AAA Ratings

The pension systems bought the securities because they had received AAA ratings, signaling they were low-risk, Harris said. After the mortgage crisis and collapse of the housing market, the funds lost more than $1 billion on the investments, according to the lawsuit. Harris is seeking triple damages.

California Judge Curtis Karnow in San Francisco has twice refused to dismiss the case after S&P argued that it’s a malicious lawsuit and Harris didn’t have grounds to file it because there was no state money involved in the pension funds’ securities purchases. S&P appealed his ruling on the malicious lawsuit theory. The company denies any wrongdoing.

The case is California v. McGraw-Hill Cos., CGC 13-528491, California Superior Court (San Francisco).

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