Plaintiffs' Personal Injury Law Firm

Credit Rating Agencies

The sub-prime mortgage crisis initially set off a wave of securities fraud claims alleging that investment banks and mortgage lenders failed to disclose material information regarding their sub-prime securities. While the full effect of the crisis is still to be realized, there has been a new round of litigation that involves a different party: Credit Rating Agencies.

Credit rating agencies, such as Moody's Investors Service, Fitch Ratings Ltd., and Standard & Poor, provided the ratings for the majority of the sub-prime securities. To do so, credit agencies were required to research the different aspects of each individual mortgage and then predict the likelihood of default on the loan. Issuers of the security hire and pay credit agencies to rate their securities, which gave credit agencies an incentive to furnish high ratings in order to ensure return business. As the real estate bubble expanded between 2002 and 2007, the three major credit rating agencies in the U.S. mentioned above saw their revenues double from $3 billion to $6 billion in 2007.

Courts are now seeing cases alleging that credit agencies gave inflated AAA ratings to many of the sub-prime securities even though the ratings did not accurately reflect the risk associated with the security. Complaints against credit agencies include allegations of a "failure to conduct due diligence and willingly assigning highest ratings to impaired instruments since they received substantial fees from issuers." New Jersey Carpenters Vacation Fund v. HarborView Mortgage Loan Trust 2006-4, No. 1:08-cv-05093-HB (S.D.N.Y. May 14, 2008). Further allegations include an improper relationship with a practice of "ratings shopping," a process by which an issuer would move from one credit agency to another if the issuer could get a better rating for the same security. Such practices led to inflated ratings and are a misrepresentation the investing public. Credit agencies are defending themselves against claims that they violated section 11 of the Securities Act of 1933.

State Attorneys general, lawmakers and regulators began scrutinizing credit agencies in 2007. From 2007 through 2008, the SEC conducted an examination of the three major credit agencies finding that the agencies struggled to handle the huge uptick in the number and complexity of sub-prime residential mortgage-backed securities and collateralized debt obligations. The 2008 SEC Chairman Christopher Cox noted that the investigation "uncovered a lack of disclosure to investors and the public, a lack of policies and procedures to manage the rating process, and insufficient attention to conflicts of interest." New rules were promulgated in 2008 requiring disclosures and documentation.

 Attorneys general in Ohio, New York, and Connecticut have taken the first steps. In Ohio, where the effect of the sub-prime crisis has been drastic, the Attorney general began an investigation and indicated that the credit agencies did not properly vet data provided by securities issuers. The New York attorney general reached an agreement with the three major agencies requiring them to disclose information about the securities they are reviewing. Additionally, the agencies must identify the practices that could compromise their independence from the issuers. In Connecticut, the attorney general filed suits against credit rating agencies on July 30, 2008 alleging deceptive and unfair practice by systematically supplying lower credit ratings to securities issued by public entities as compared to corporate debt with similar default rates.

Litigation against credit rating agencies has been the most recent evolvement that the sub-prime crisis has brought. In these early stages, shareholders and state attorneys general have been the first to file, however, many more are expected to follow suit.