S&P Judge Tentatively Rules It Must Face Deception Claims

McGraw Hill Financial Inc.’s Standard & Poor’s unit must face California’s claims it deceived the state’s pension funds in its ratings of mortgage-back securities, a judge said in a provisional ruling.

California Superior Court Judge Curtis Karnow in San Francisco said yesterday he was inclined to deny the company’s request to throw out the state’s claims of deceptive conduct from a lawsuit alleging S&P violated false-advertising and business practices laws.

The state accuses S&P of using “magic numbers” to inflate ratings of mortgage-backed securities bought by the California Public Employees’ Retirement System and the state’s teacher pension fund. The funds lost more than $1 billion on the investments, according to the state.

S&P is being sued for fraud by the U.S. Justice Department in a separate case in federal court in Santa Ana, California. The U.S. accuses the company of lying about its ratings being free of conflicts of interest. The firm has said it provided the same credit ratings as Moody’s Corp. and Fitch Ratings on residential mortgage-backed securities and collateralized debt obligations before the credit crisis.

The Justice Department has said it may seek as much as $5 billion in penalties for losses to federally insured financial institutions that relied on New York-based S&P’s ratings prior to the collapse of the U.S. housing market that wiped out the value of many of the securities.

AAA Ratings

The California pension systems bought the securities because they had received AAA ratings, signaling they were low-risk, California Attorney General Kamala Harris said in the lawsuit.

S&P has denied wrongdoing in both lawsuits.

Karnow didn’t say in court yesterday when he would issue a final ruling.

The state case is California v. McGraw-Hill Cos., CGC 13-528491, California Superior Court (San Francisco). The federal case is U.S. v. McGraw Hill Financial Inc., 13-cv-00779, U.S. District Court, Central District of California (Santa Ana).

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