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Cordray Sues National Rating Agencies for False and Misleading Ratings

November 20, 2009
Source: The Office of Ohio Attorney General

COLUMBUS -- Ohio Attorney General Richard Cordray today filed a lawsuit against Standard & Poor’s, Moody’s and Fitch, three national agencies that are responsible for providing accurate credit ratings of investments. The lawsuit, filed in United States District Court for the Southern District of Ohio on behalf of five Ohio public employee retirement and pension funds, charges the rating agencies with wreaking havoc on U.S. financial markets by providing unjustified and inflated ratings of mortgage-backed securities in exchange for lucrative fees from securities issuers.

Attorney General Cordray noted his reasons for bringing this lawsuit: “The rating agencies were central players in causing the worst economic crisis in Ohio since the Great Depression. The rating agencies assured our employee pension funds that many of these mortgage-backed securities had the highest credit ratings and the lowest risk. But they sold their professional objectivity and integrity to the highest bidder. The rating agencies’ total disregard for the life’s work of ordinary Ohioans caused the collapse of our housing and credit markets and is at the heart of what’s wrong with Wall Street today.” 

The lawsuit alleges the rating agencies gave many of these exotic investments the highest investment-grade credit rating. This rating – often referred to as “AAA”– is consistent with the credit ratings given to the safest corporate bonds, and it assured institutional investors, including the Ohio funds, that the investments were extremely safe with a very low risk of default. According to preliminary estimates, the improper ratings cost the Ohio Funds losses in excess of $457 million.

“Contrary to the representations of the rating agencies, these mortgage-backed securities were, in fact, high-risk investments that lost tremendous value as the housing market collapsed and mortgage foreclosures accelerated,” said Cordray, a former state and county treasurer.

The lawsuit alleges that the rating agencies made spectacularly misleading evaluations of mortgage-backed securities due in part to the lucrative fees they received from the same issuers they were supposed to be objectively evaluating. Public statements and testimony indicate that rating agency executives and analysts knew their ratings of mortgage-backed securities were wrong. Indeed, one rating agency analyst admitted that the market for mortgage-backed securities was “little more than a house of cards” with a much higher risk of devaluation than indicated by the purported investment-grade “AAA” rating. Another rating agency analyst said that “we rate every deal. It could be structured by cows and we would rate it.”

Raymond McDaniel, CEO and Chairman of Moody’s, described the ratings frenzy: “What happened in ’04 and ’05 … is that our competition, Fitch and S&P, went nuts. Everything was investment-grade. It really didn’t matter… No one cared because the machine just kept going.” McDaniel added that Moody’s also “[drank] the Kool-Aid.” 

“This misconduct has caused immense harm to Ohio police officers, firefighters, teachers, government workers, investors and retirees,” said Cordray. “Our lawsuit against these rating agencies is another step toward holding Wall Street accountable for its wrongs.”

The Ohio lawsuit is being brought on behalf of the Ohio Public Employees Retirement System, the State Teachers Retirement System of Ohio, the Ohio Police & Fire Pension Fund, the School Employees Retirement System of Ohio and the Ohio Public Employees Deferred Compensation Program.

“The OPERS Board of Trustees authorized filing this litigation to ensure that we can rely upon the industry credit rating agencies to give us independent, objective information when making our investment decisions in the best interests of our members,” said Cinthia Sledz, chair of the OPERS Board’s Proxy Policy and Corporate Governance Committee. “This is a fiduciary responsibility that the board takes very seriously, and it is consistent with past actions the board has taken to encourage corporate governance reform and to seek compensation for unlawful behavior. It’s with that same commitment to Ohio’s public workers that we participate in this important litigation.”   

“On behalf of Ohio’s police officers and firefighters, our Board of Trustees agreed to join this suit in order to correct an abuse of public trust,” said William Estabrook, Executive Director of the Ohio Police and Fire Pension Fund. “We believe investors have a right to rely on the integrity of the ratings published by these companies.”

Attorney General Cordray’s fight to hold Wall Street accountable now includes eight major lawsuits, which have recovered more than $2 billion to date. Recent settlements include $284.5 million with secondary defendants in a case involving AIG; $400 million with Marsh & McLennan; $475 million with Merrill Lynch; and the cancelling of $922 million in improperly granted stock options to corporate executives at UnitedHealth. Attorney General Cordray continues to represent the Ohio Funds in several major securities cases, including class action securities lawsuits against AIG, Bank of America, Fannie Mae, and Freddie Mac.

Attorney General Cordray is drawing on the expertise of the law firms Entwistle & Cappucci LLP; Lieff Cabraser Heimann & Bernstein LLP; and Schottenstein Zox & Dunn Co., LPA to assist with the litigation.

To read today’s filing, visit


Holly Hollingsworth: (614) 644-0508
cell: (614) 353-7576
Kim Kowalski: (614) 728-9692
cell: (614) 893-6018

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