Late in April 2010, Shira A. Scheindlin, a New York federal district court judge, denied a motion to dismiss filed by Moody’s Investors Service and Standard & Poor’s Financial Services. The suit was filed against them and the other “big” rating firm, Fitch, by several investors as a class action.
The investors claim the three rating firms acted together to conceal or hide the true credit rating of, and so the risk of investing in, Rhinebridge, a structured investment vehicle (SIV). Rhinebridge failed, and the investors lost millions.
Moody’s and S&P argued the case should be thrown out because Rhinebridge collapsed because of the credit crisis that began in 2007, and not because of any wrongdoing by Moody’s and S&P.
Judge Scheindlin noted that Moody’s and S&P might eventually win the case on their argument. But on a motion to dismiss the investors’ claims had to be accepted as true. She added it wasn’t absolutely clear that the 2007 credit crisis was the only reason for Rhinebridge’s failure.
For the first time, credit rating agencies may not get the protection of the First Amendment. A New York judge refused to dismiss a lawsuit against Moody’s Investors Service Inc. and Standard & Poors. The judge rejected their argument that investors can’t sue them over deceptive ratings because their opinions are protected by free speech rights. This decision affects many credit rating agencies and possibly change the entire industry.
What Are Credit Rating Agencies?
A credit rating assigns a score to issuers that sell some type of debt security or bond. Usually the issuers are companies, governments and non-profit organizations that sell a note and traded on the open market. To come up with the score, the credit rating agency considers the issuer’s ability to repay the loan and other factors. The credit rating agency then assigns a score, such as AAA or BB. Investors rely on that score when deciding whether the note is a good investment.
Recent Lawsuits against Credit Rating Agencies
Rating agencies frequently get sued by investors who claim their rating was wrong or deceptive. Recently, rating agencies have been accused of issuing misleading opinions about mortgage-backed securities and are being partly blamed for the recent financial crisis.