S&P Loses Bid to Unify State Suits Claiming Bad Ratings

McGraw Hill Financial Inc.’s Standard & Poor’s unit lost its bid to consolidate state claims that it lied about the objectivity of its ratings in the run-up to the 2008 financial crisis, forcing it to fight lawsuits in 18 state courts.

U.S. District Judge Jesse Furman in Manhattan ruled the suits were properly filed in state courts under local consumer-protection laws. S&P argued federal laws should govern the claims.

“With few exceptions, the doors to federal court do not swing open merely because a party has a national presence or is alleged to have committed wrongdoing that is national in scope, or merely because litigation in federal court might be more efficient,” Furman said yesterday in his decision.

Most of the state lawsuits were filed last year, after the U.S. Justice Department sued New York-based S&P for allegedly defrauding investors that relied on its ratings of residential mortgage-backed securities and collateralized debt obligations. The U.S. has said it may seek as much as $5 billion.

Consolidating the state cases in one federal court would have allowed S&P to obtain one ruling as opposed to a score of potentially conflicting court decisions across the country. Additionally, multiple lawsuits under state laws may cost more to defend in legal fees and expenses.

Not ‘Substance’

“This ruling concerns only whether these matters will be litigated in federal or state court and not the substance of the claims,” Ed Sweeney, a spokesman for S&P, said in an e-mailed statement. “We are committed to fully defending against these meritless claims upon their remand to the state courts.”

The claims by the states mirror those of the Justice Department that S&P’s ratings were not independent and objective, as it told investors, but motivated by the desire to win business from issuers of the securities. S&P has denied the allegations and has argued the U.S. lawsuit was retaliation by the government for S&P’s downgrade of the U.S. debt in 2011.

The Justice Department’s lawsuit against S&P in Santa Ana, California, federal court isn’t affected by Furman’s ruling. One case transferred yesterday, filed by Mississippi, also named Moody’s Investor’s Service Inc. as a defendant. Mississippi had sued S&P and Moody’s in 2011, two years before the other lawsuits.

Michael Adler, a spokesman for New York-based Moody’s, declined to comment on yesterday’s ruling.

S&P and Moody’s last month lost a bid to overturn a California court ruling that they must face a lawsuit by the state’s Public Employees Retirement System. In that case, the fund alleged the firm’s inaccurate risk assessments on investments led to $800 million in losses.

The case is In re Standard & Poor’s Rating Agency Litigation, 13-md-2446, U.S. District Court, Southern District of New York (Manhattan).