Ratings Agencies Hit With Suit Blaming Them for Economic Meltdown

Well, no need to worry that Floyd Abrams will be sitting around twiddling his thumbs if newspapers go out of business. For the foreseeable future, the Cahill Gordon & Reindel partner and famed defender of the free press will be busy trotting out First Amendment arguments on behalf of ratings agencies accused of contributing to the economic meltdown via overly rosy evaluations of drecky high-risk securities. A couple of weeks ago we told you that the California Public Employees' Retirement System had thrown its $173 billion of muscle into the litigation against Moody's, Standard & Poor's and Fitch. Now, a second pension fund, the Public Employees' Retirement System of Mississippi, has joined the fight. On Friday the Mississippi fund filed a securities class action against the ratings agencies in federal district court in Brooklyn.

The complaint claims that Moody's, Standard & Poor's and Fitch had a practice of misleading investors by bestowing high ratings on pools of high-risk subprime mortgage-backed investment entities. But unlike the CalPERS case, which was filed in California state court and focuses on only the pension fund's losses, the Mississippi class action purports to represent "all persons or entities who purchased mortgage pass-through certificates" sold by J.P. Morgan Acceptance Corp.

We should note that the MissPERS class action against the ratings agencies is related to a pending class action against JPMAC in Brooklyn federal district court; MissPERS has moved to be lead counsel in that case, which was originally filed by a pension fund represented by Coughlin Stoia Geller Rudman & Robbins. JPMAC is represented by Sidley Austin; defense counsel for the ratings agencies in the MissPERS case are not yet listed on the docket.

MissPERS counsel Marian Rosner of Wolf Popper declined to comment to the Am Law Litigation Daily on the suit against the ratings agencies, but it looks to us like the Mississippi pension fund complaint anticipates the First Amendment defense that has worked well for the agencies in the past. (We love the headline on Wall Street Journal reporter Nathan Koppel's story: "Credit Raters Plead the First.") But the MissPERS complaint contends Moody's, Standard & Poor's and Fitch didn't merely tout the securities but actually worked with J.P. Morgan Acceptance to create them. "Since only the rating agencies knew how to structure the [mortgage-backed securities] deals so they could maximize the number of 'AAA' tranches produced," the complaint alleges, "the ratings agencies held the key to creating salable [securities]."

This article first appeared on The Am Law Litigation Daily blog on AmericanLawyer.com.