Standard & Poor’s and Moody’s Investors Service Inc. must face California Public Employees’ Retirement System’s $1 billion lawsuit over their ratings of structured investment vehicles, a California judge said.
The pension fund “produced sufficient evidence” that the ratings companies made misrepresentations “without reasonable grounds” to believe they were telling the truth, San Francisco County Superior Court Judge Richard Kramer said in a ruling Wednesday.
Sacramento-based CalPERS, with $223.1 billion in assets, sued the three major bond-rating companies in July 2009 for losses it said were caused by their “wildly inaccurate” risk assessments on so-called SIVs.
The ratings companies all gave top marks to Cheyne Finance, Stanfield Victoria Funding and Sigma Finance, prompting CalPERS to invest in them in 2006, the fund said in its complaint. The SIVs collapsed in 2007 and 2008, according to the CalPERS complaint. The underlying assets of the three firms consisted primarily of risky subprime mortgages, CalPERS said.
The judge rejected a request by the rating companies to dismiss the case under a California law designed to fend off lawsuits meant to chill public debate. The judge ruled in 2010 that the ratings are a form of speech that’s protected by the law. To fend off dismissal, CalPERS then had to show a probability of prevailing in the lawsuit by presenting sufficient facts.
“It’s not a ruling on the merits of the case,” said Paul Clifford, an attorney at the California Anti-SLAPP Project, a Berkeley, Calif.-based law firm that specializes in similar lawsuits. SLAPP stands for “strategic lawsuits against public participation.”
Moody’s and S&P have 60 days to appeal the ruling, and the appeals court would take a fresh look at the evidence without considering whether Mr. Kramer erred in his decision, Mr. Clifford said in a telephone interview. Neither side can present new evidence, he added.
Edward Sweeney, a spokesman for Standard & Poor’s Rating Services reached via e-mail, had no immediate comment about the ruling. Michael Adler, a Moody’s spokesman, didn’t immediately respond to an e-mail message seeking comment on the decision. A phone call to Sacramento-based CalPERS’ media office wasn’t immediately returned.