Top financial rating agencies, Moody’s and Standard & Poor’s, must face allegations they may be liable for California’s public employee pension system’s nearly $1 billion in losses during the mortgage crisis.
A state Court of Appeals refused to toss out the lawsuit by the California Public Employee Retirement System, CalPERS, in a decision Friday.
CalPERS accused the agencies of assigning highly favorable credit ratings to three structured investment vehicles (SIVs) that ultimately failed, causing billions of dollars in losses to CalPERS and other investors.
CalPERS said in its lawsuit that in 2006 and 2007, it invested roughly $1.3 billion n assets in medium-term debt issued by the SIVs after the rating agencies gave then the highest rating – “AAA.”
The SIVs ultimately filed bankruptcy and CalPERS lost as much as $1 billion, according to its lawsuit. SIVs typically represent asset-backed securities, such as auto loans, home equity loans and residential mortgage-backed securities, as well as credit card loans.
CalPERS argued that the rating agencies played a much more active roale in assisting the issuers of the structured debt product in advance of the rating, which created and inherent conflict of interest.
The rating agencies sought to have the CalPERS lawsuit dismissed, using a law generally designed to protect free speech rights of individuals or small groups who protest government, or corporate actions. The law, known as the anti-SLAPP statute, allows for dismissal of harassing lawsuits filed purely to silence critics, rather than win a legal claim.
SLAPP suit, stands for Strategic Lawsuit Against Public Participation. Generally, they are defamation lawsuits, typically filed by a large developer seeking to silence critics of a project by forcing them to pay onerous legal fees to defend their claims.
The Anti-SLAPP law allows for immediate dismissal of a lawsuit determined to be a harassing SLAPP lawsuit. This is the claim Moody’s and Standard and Poor’s made against CalPERS, that they were victims of a SLAPP action.
Justice Martin Jenkins of the First District Court of Appeals said, “We conclude the First Amendment provides no basis for dismissing this case on anti-SLAPP grounds. He agreed with another appellate court that the anti-SLAPP law does not apply “in every case where the defendant may be able to raise a First Amendment defense.”
He concluded that CalPERS provided enough evidence that the ratings “are actionable as ‘professional opinions’ or ‘deliberate affirmations of fact’ regarding the nature and quality of the SIV product.”
He affirmed the trial court order denying the rating agency move to throw out the CalPers lawsuit under the anti-SLAPP law.
Case: CalPERS v. Moody’s Investors Service, No A134912