This month, the U.S. Court of Appeals for the Sixth Circuit refused to revive statutory and common law MBS claims made by five Ohio pension funds: The Ohio Police & Fire Pension Fund, the State Teachers Retirement System of Ohio, the Ohio Public Employees Retirement System, the Ohio Public Employees Deferred Compensation Program, and the School Employees Retirement Systems of Ohio. All of them are run by the state for public employees.
Per the court’s opinion, between 2005 and 2008, the funds had invested hundreds of million of dollars in 308 mortgage-backed securities that all were given AAA or the equivalent from one of the three credit rating agencies. When MBS value dropped during this time, the Funds lost about $457 million.
The plaintiffs believe that the reason that they lost their money is because the ratings that were given to the MBS were false and misleading. They filed their Ohio securities lawsuit under the state’s “blue sky ” laws, as well as the common law theory of negligent misrepresentation.
The Funds claim that the defendants had a conflict of interest with the “issuer pays” model, which tainted the MBS ratings that they issued, and that they neglected to disclose this weakness even while knowing that investors depended on accuracy to make their investment choices.
Finding that the credit rating agencies were not the ones that sold the securities, nor did they assist the sellers in making fraudulent transactions, the district court dismissed the MBS securities lawsuit. Also, that court found the plaintiffs’ statements of opinion to be not actionable because the complaint did not allege that the defendants believed their ratings to be inaccurate when they made them.
The Sixth Circuit affirmed the district’s court ruling. It noted that Ohio Revised Code Section 1707.41(A) establishes a private remedy against securities sellers based on false sales material and persons that get the profits of these types of sales. With this mortgage-backed securities case, however, it found that the Funds did not allege that the defendants sold or offered the securities that they rated and this particular cold section would have been contingent upon if the CRAs profited from the MBS sales. The appeals court noted that the fees the defendants received for issuing the ratings were fixed costs of an MBS issue and don’t have the “contingent quality” associated with profits.
Also, even though the Funds wanted relief too from Section 1707.43(A), which allows securities fraud victims a rescission remedy, the Sixth Court said that the plaintiffs mainly relied on the credit raters’ alleged violation of 1707.41(A), as support for their claim to Section 1707.43(A) rescission, which, the court determined is meritless. The court did not go with the Funds efforts to save their rescission remedy by claiming that the defendants violated Section 1707.44(B)(4), which only blocks affirmative misrepresentations.
As for common-law misrepresentations, the court affirmed that the plaintiffs couldn’t hold the agencies liable for this either under Ohio law or New York law. The Sixth Court said that the Funds failed to properly allege that the defendants owed them a duty or that the ratings that were issued were misrepresentations that weren’t actionable.
“Considering the widespread reliance upon their opinions, it is incredible that securities credit rating agencies are exempt from responsibility for their reporting,” said Shepherd Smith Edwards and Kantas, LTD, LLP Founder and Mortgage-Backed Securities Lawyer William Shepherd. Their only purpose is to give investors some sense of the risks involved in an investment. They serve absolutely no purpose to the issuers of the securities except to help them convince investors to invest. Thus, only the investor is the target of such information. CRA’s should be legally responsible for sloppy or misleading reports which cause investors to lose their money.”
More Blog Posts:
Standard & Poor’s Misled Investors By Giving Synthetic Derivatives Its Highest Ratings, Rules Australian Federal Court, Institutional Investor Securities Blog, November 8, 2012
Securities Law Roundup: Ex-Sentinel Management Group Execs Indicted Over Alleged $500M Fraud, Egan-Jones Rating Wants Court to Hear Bias Claim Against SEC, and Oppenheimer Funds Pays $35M Over Alleged Mutual Fund Misstatements, Stockbroker Fraud Blog, June 13, 2012
Moody’s, Fitch, and Standard and Poor’s Were Exercising Their 1st Amendment Rights When They Gave Inaccurate Subprime Ratings to SIVs, Says Court, Institutional Investor Securities Blog, December 30, 2010