Opinion

Alison Frankel

No free-speech protection for rating agencies… again: CA judge

By Alison Frankel
January 13, 2012

The rating agencies S&P and Moody’s have struck out in their second attempt to nix a billion-dollar negligence suit by the California Public Employees’ Retirement System on free-speech grounds.

On Wednesday, San Francisco Superior Court Judge Richard Kramer denied the rating agencies’ motion to strike CalPERS’s suit. In a two-part analysis under California’s anti-SLAPP law, which is intended to bar unwarranted defamation suits, Kramer agreed with S&P and Moody’s that the ratings they conferred on private-placement mortgage-backed securities were “acts that arise from their right of free speech under the United States or California Constitution in connection with a public issue.” But the judge went on to conclude that CalPERS and its lawyers at Berman DeValerio had established a prima facie likelihood that the pension fund would succeed on its negligence claim, so the anti-SLAPP law doesn’t apply.

The ruling is very good news for CalPERS, which previously fended off a rating agency effort to toss its case on First Amendment grounds. Like U.S. District Judge Shira Scheindlin of Manhattan federal court in Abu Dhabi Commercial Bank’s case against S&P and Moody’s, Kramer ruled in 2010 that the agencies’ First Amendment right to public expression does not protect them from liability for ratings conferred on special investment vehicles, or SIVs, which are not publicly circulated but shown only to a limited number of investors. After the California state judge denied the rating agencies’ motion to dismiss in 2010 — and the intermediate state appellate court declined to review the ruling — the agencies’ lawyers moved to strike the CalPERS suit under the anti-SLAPP law. Essentially, the motion gave them a second chance to argue that free-speech rights shield them from liability for their SIV ratings.

In making a prima facie case that the pension fund would prevail on its negligence, CalPERS’ lawyers were handicapped by the discovery stay in the case. The May 27 brief setting out the pension fund’s evidence relies on evidence that emerged in a Congressional investigation of the rating agencies’ role in the economic collapse, as well as expert testimony on the credit-rating agencies’ business model. CalPERS also offered evidence that its advisers relied on AAA credit ratings when they decided to invest $1.3 billion in three mortgage-backed SIVs. “Moody’s, S&P, and Fitch had no reasonable ground to believe that their SIV ratings were true and accurate,” CalPERS asserted. The credit agencies only got paid in full if they handed out AAA ratings, the brief said, and knew that if they refused to bless an offering, the sponsor would turn to a rival agency.

Fitch settled out of the case this summer (for no payout), but in S&P and Moody’s July 22 response to CalPERS’s brief, their lawyers at Cahill Gordon & Reindel (for S&P) and Satterlee Stephens Burke & Burke (for Moody’s) argued that CalPERS hadn’t shown sufficient evidence that it relied on the SIVs’ ratings. “The record on this motion … makes clear CalPERS’s explicit recognition that the ratings were not recommendations to buy, its acknowledgment that it should not rely on ratings, the acknowledgment by its agents that they had conducted an independent investigation of the investments and the wealth of information available to them concerning the investment,” the brief said. More fundamentally, the rating agencies asserted, their AAA ratings were opinions about the securities, so they can’t be the basis of a claim.

Kramer’s ruling isn’t the rating agencies’ last chance to argue for free-speech protection. The anti-SLAPP statute includes a right to appeal. And even if that’s unsuccessful, S&P and Moody’s can revive their First Amendment arguments on a summary judgment motion.

Daniel Barenbaum of Berman DeValerio referred me to CalPERS, which said via email, “We’re pleased with the court’s ruling.” S&P spokesperson Ed Sweeney sent an email comment: “We are pleased that the court confirmed that ratings are protected speech. However, we believe the court erred in denying our motion under the anti-SLAPP statute. We intend to appeal.” A Moody’s spokesman said, “While we are disappointed in the court’s ruling on this motion, we are confident that Moody’s will prevail on the merits of the case at a later stage.”

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