Five of Ohio's public employee retirement and pension funds announced today that they have filed suit against three national credit rating agencies for allegedly releasing unjustified ratings, which, in turn "wreaked havoc" on their deflating investments during the stock market crash, state Attorney General Richard Cordray said today.

According to the Nov. 20 press release, Cordray states Standard & Poor's,Moody's Investors Service and Fitch Ratings provided inflated ratings for MBS in exchange for lucrative fees from their issuers.

"The rating agencies were central players in causing the worst economic crisis in Ohio since the Great Depression," Cordray said. "The rating agencies assured our employee pension funds that many of these mortgage-backed securities had the highest credit ratings and the lowest risk."

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

The retirement funds allege that the improper ratings resulted in an excess of $457 million in losses.

"Our board of trustees agreed to join this suit in order to correct an abuse of public trust," William Estabrook, OP&F executive director, said in the release. "We believe investors have a right to rely on the integrity of the ratings published by these companies."

Cinthia Sledz, chair of the OPERS board's proxy policy and corporate governance committee, added.

"This is a fiduciary responsibility that the board takes very seriously," Sledz said. "And it is consistent with past actions the board has taken to encourage corporate governance reform and to seek compensation for unlawful behavior." 

Cordray, a former state and county treasurer, alleges that the rating agencies gave many exotic investment firms the highest credit rating or a 'AAA', which is usually given to the "safest corporate bonds," and assured institutional investors that they were extremely safe.

"Our lawsuit against these rating agencies is another step toward holding Wall Street accountable for its wrongs," Cordray's statement said.

Recently, Cordray's plight was reaffirmed. He announced the settlement of a Marsh & McLennan suit, which recouped $400 million for Ohio and New Jersey state funds. And on Wednesday, the Attorney General announced that Bank of America would disclose important shareholder documents as a result of a New York District Court¹s ruling to partially lift a discovery stay.

Kevin Duignan, Fitch's managing director and global head of corporate communications, stated the rating agency has no comment due to the fact it has "not received the Ohio Attorney General's complaint."

"We believe the claim has no legal or factual merit, and we intend to defend ourselves vigorously against it,² said Frank Briamonte, McGraw-Hill Cos.' senior director for corporate communications, told Investment Management Weekly today, on behalf of S&P. "A recent [Securities and Exchange Commission] examination of our business practices found no evidence that decisions about ratings methodologies or models were based on attracting or losing market share."

As of press time however, IMW's attempts to obtain comment from Moody's proved unsuccessful.

 

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.