Editor: David Reiss
Brooklyn Law School

January 9, 2013

Scheindlin Allows More Fraud Claims Against Rating Agencies To Go To Trial

By David Reiss

Judge Scheindlin (SDNY) has ruled that investors can proceed with their fraud claims against the big three rating agencies for giving a top rating to a SIV.  There are no surprises in this opinion as it tracks the reasoning of Judge Scheindlin’s earlier opinion in a related action (Abu Dhabi Commercial Bank v. Morgan Stanley & Co. Inc. (Abu Dhabi I), No. 08 Civ. 7508, WL 3584278 (S.D.N.Y. Aug. 17, 2012).)

I think this quotation from the King County opinion puts the issue nicely:

While ratings are not objectively measurable statements of fact, neither are they mere puffery or unsupportable statements of belief akin to the opinion that one type of cuisine is preferable to another. Ratings should best be understood as fact-based opinions. When a rating agency issues a rating, it is not merely a statement of that agency’s unsupported belief, but rather a statement that the rating agency has analyzed data, conducted an assessment, and reached a fact-based conclusion as to creditworthiness. If a rating agency knowingly issues a rating that is either unsupported by reasoned analysis or without a factual foundation, it is stating a fact-based opinion that it does not believe to be true.41

I subsequently held that the rating agency defendants could “only be liable for fraud if the ratings both misstated the opinions or beliefs held by the Rating Agencies and were false or misleading with respect to the underlying subject matter they address.” To sustain a fraud claim against each rating agency, then, plaintiffs must provide evidence that the rating agency issued a rating that it knew was unsupported by facts or analysis — that the rating agency did the equivalent of issuing a restaurant review despite never having dined at the restaurant. (12-13, footnote omitted)

Judge Scheindlin has now made it clear that rating agencies may face liability for their opinions under certain circumstances.  Time will tell whether the 2nd Circuit (which has favored the rating agencies in other cases) will agree.

I can only find the King County opinion and the Abu Dhabi opinion behind the NYLJ paywall for now.

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